Item 7 -
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(in thousands,
except head count, ratios, time periods and percentages)
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. In addition to historical financial information, the following discussion may contain predictions, estimates and other forward-looking statements that involve a number of risks and uncertainties, including those discussed under Item 1A and elsewhere in this Form 10-K. These risks could cause our actual results to differ materially from any future performance suggested below. Please see “Cautionary Statement for Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995” at the beginning of this Form 10-K.
Overview
We design, develop and market digital solutions for identity, security, and business productivity that protect and facilitate electronic transactions via mobile and connected devices. We are a global leader in providing anti-fraud and digital transaction management solutions to financial institutions and other businesses. Our solutions secure access to online accounts, data, assets, and applications for global enterprises; provide tools for application developers to easily integrate security functions into their web-based and mobile applications; and facilitate end-to-end financial agreement automation including digital identity verification, customer due diligence, electronic signature, secure storage, and document management. Our core technologies, multi-factor authentication, and transaction signing, strengthen the process of preventing hacking attacks against online and mobile transactions to allow companies to transact business safely with remote customers.
We offer cloud based and on premises solutions using both open standards and proprietary technologies. Some of our proprietary technologies are patented. Our products and services are used for authentication, fraud mitigation, e-signing transactions and documents, and identity management in Business-to-Business (“B2B”), Business-to-Employee (“B2E”) and Business-to-Consumer (“B2C”) environments. Our target market is business processes using an electronic interface, particularly the internet, where there is risk of unauthorized access. Our products can increase security associated with accessing business processes, reduce losses from unauthorized access, and reduce the cost of the process by automating activities previously performed manually.
Online and mobile application owners and publishers benefit from our expertise in multi-factor authentication, document signing, transaction signing, application security, and in mitigating hacking attacks. Our convenient and proven security solutions enable low friction and trusted interactions between businesses, employees, and consumers across a variety of online and mobile platforms.
Our newest product offerings enhance our library of mobile application security solutions, expand our risk-based anti-fraud capabilities, and deliver broad-based e-signature capabilities that enable secure and simple digitized business transactions.
Our growth strategy includes:
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Expanding our portfolio of services that enable institutions to mitigate fraud, comply with regulations, easily on-board customers, and adaptively authenticate transactions;
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Enabling secure digitization of business processes at banks and enterprises with eSignature and identity verification solutions;
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Leveraging our unique portfolio of hardware, software, and recurring services across a global footprint;
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Driving increased demand for our products in new applications, new markets, and new territories; and
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Strategically acquiring companies that expand our technology portfolio or customer base and increase our recurring revenue.
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Our Business Model
We offer our products through a product sales and licensing model or through our services platform, which includes our cloud-based service offering.
Our solutions are sold worldwide through our direct sales force, as well as through distributors, resellers, systems integrators, and original equipment manufacturers. Our sales force is able to offer customers a choice of an on-site implementation using our traditional on-premises model or a cloud implementation for some solutions using our services platform.
Industry Growth
We believe there are no reliable measurements of the industry size or growth rates for the segments that we serve. However, we believe the market for authentication, anti-fraud, and electronic signature solutions will continue to grow driven by new government regulations, growing awareness of the impact of cyber-crime, and the growth in electronic commerce. The issues driving growth are global however, the rate of adoption in each country is a function of culture, competitive position, economic conditions and use of technology.
Economic Conditions
Our revenue may vary significantly with changes in the economic conditions in the countries in which we currently sell products. With our current concentration of revenue in Europe and specifically in the banking and finance vertical market, significant changes in the economic outlook for the European Banking market may have a significant effect on our revenue.
Cybersecurity Risks
Our use of technology is increasing and is critical in three primary areas of our business:
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1.
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Software and information systems that we use to help us run our business more efficiently and cost effectively;
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2.
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The products we have traditionally sold and continue to sell to our customers for integration into their software applications contain technology that incorporates the use of secret numbers and encryption technology; and
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3.
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New products and services that we introduced to the market are focused on processing information through our servers or in the cloud.
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We believe that the risks and consequences of potential incidents in each of the above areas are different.
In the case of the information systems we use to help us run our business, we believe that an incident could disrupt our ability to take orders or deliver product to our customers, but such a delay in these activities would not have a material impact on our overall results. To minimize this risk, we actively use various forms of security and monitor the use of our systems regularly to detect potential incidents as soon as possible.
In the case of products that we have traditionally sold, we believe that the risk of a potential cyber incident is minimal. We offer our customers the ability to either create the secret numbers themselves or have us create the numbers on their behalf. When asked to create the numbers, we do so in a secure environment with limited physical access and store the numbers on a system that is not connected to any other network, including other OneSpan networks, and similarly, is not connected to the internet.
In the case of our cloud-based solutions, which involve the processing of customer information, we believe a cyber-incident could have a material impact on our business. While our revenue from cloud-based solutions comprises a minority of our revenue today, we believe that these solutions will provide substantial future growth. A cyber incident involving these solutions in the future could substantially impair our ability to grow the business and we could suffer significant monetary and other losses and significant reputational harm.
To minimize the risk, we review our product security and procedures on a regular basis. Our reviews include the processes and software code we are currently using as well as the hosting platforms and procedures that we employ. We mitigate the risk of cyber incidents through a series of reviews, tests, tools and training. Certain insurance coverages may apply to certain cyber incidents. Overall, we expect the cost of securing our networks will increase in future periods, whether through increased staff, systems or insurance coverage.
While we did not experience any cyber incident in 2018, 2017, or 2016 that had a significant impact on our business, it is possible that we could experience an incident in 2019 or future years, which could result in unanticipated costs.
Currency Fluctuations
In 2018, approximately 74% of our revenue and approximately 79% of our operating expenses were generated/incurred outside of the U.S. In 2017, approximately 72% of our revenue and approximately 76% of our operating expenses were generated/incurred outside of the U.S. While the majority of our revenue is generated outside of the U.S., the majority of our revenue is billed in U.S. Dollars. In 2018, approximately 61% of our revenue was denominated in U.S. Dollars, 34% was denominated in Euros and 5% was denominated in other currencies. In 2017, approximately 66% of our revenue was denominated in U.S. Dollars, 29% was denominated in Euros, and 5% was denominated in other currencies.
In general, to minimize the net impact of currency fluctuations on operating income, we attempt to denominate an amount of billings in a currency such that it would provide a hedge against the operating expenses being incurred in that currency. We expect that changes in currency rates may also impact our future results if we are unable to match amounts of revenue with our operating expenses in the same currency. If the amount of our revenue in Europe denominated in Euros continues as it is now or declines, we may not be able to balance fully the exposures of currency exchange rates on revenue and operating expenses.
The financial position and the results of operations of our foreign subsidiaries, with the exception of our subsidiaries in Switzerland, Singapore and Canada, are measured using the local currency as the functional currency. Accordingly, assets and liabilities are translated into U.S. Dollars using current exchange rates as of the balance sheet date. Revenues and expenses are translated at average exchange rates prevailing during the year. Translation adjustments arising from differences in exchange rates generated a comprehensive loss of $5.5 million in 2018, comprehensive income of $4.0 million in 2017 and comprehensive loss of $2.5 million in 2016. These amounts are included as a separate component of stockholders’ equity. The functional currency of our subsidiaries in Singapore, Switzerland, and certain operations in Canada are measured in U.S. Dollars.
Gains and losses resulting from foreign currency transactions are included in the consolidated statements of operations as other non-operating income/expense. We reported foreign exchange transaction losses of $0.2 million and $0.5 million in 2018 and 2017, respectively, and foreign exchange transaction gains of $0.1 million in 2016.
Components of Operating Results
Revenue
We generate revenue from the sale of our hardware products, software licenses, subscriptions, and services. We believe comparison of revenues between periods is heavily influenced by the timing of orders and shipments reflecting the transactional nature of our business.
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Product
and
license revenue
. Product and license revenue includes hardware products and software licenses.
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Service and other revenue
. Service and other revenue includes software as a service (“SaaS”) solutions, maintenance and support, and professional services.
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Cost of Goods Sold
Our total cost of goods sold consists of cost of product and license revenue and cost of service and other revenue. We expect our cost of goods sold to increase in absolute dollars as our business grows, although it may fluctuate as a percentage of total revenue from period to period.
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Cost of product and license revenue
. Cost of product and license revenue primarily consists of direct product costs.
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Cost of service and other revenue
. Cost of service and other revenue primarily consists of costs related to SaaS solutions, including personnel and equipment costs, and personnel costs of employees providing professional services and maintenance and support.
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Gross Profit
Gross profit as a percentage of total revenue, or gross margin, has been and will continue to be affected by a variety of factors, including our average selling price, manufacturing costs, the mix of products sold, and the mix of revenue among products, subscriptions and services. We expect our gross margins to fluctuate over time depending on these factors.
Operating Expenses
Our operating expenses are generally based on anticipated revenue levels and fixed over short periods of time. As a result, small variations in revenue may cause significant variations in the period-to-period comparisons of operating income or operating income as a percentage of revenue.
Generally, the most significant factor driving our operating expenses is headcount. Direct compensation and benefit plan expenses generally represent between 55% and 60% of our operating expenses. In addition, a number of other expense categories are directly related to headcount. We attempt to manage our headcount within the context of the economic environments in which we operate and the investments we believe we need to make for our infrastructure to support future growth and for our products to remain competitive.
In May 2018, with the acquisition of Dealflo, our headcount increased by 71. Average headcount for the full-year 2018, 2017, and 2016 was 685, 614, and 595, respectively.
Historically, operating expenses have been impacted by changes in foreign exchange rates. We estimate the change in currency rates in 2018 compared to 2017 resulted in an increase in operating expenses of approximately $0.3 million in 2018.
The comparison of operating expenses can also be impacted significantly by costs related to our stock-based and long-term incentive plans. For full-year 2018, 2017, and 2016, operating expenses included $6.1 million, $5.4 million, and $4.9 million, respectively, related to stock-based and long-term incentive plans. Long-term incentive plan compensation expense includes both cash and stock-based incentives.
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Sales and marketing
. Sales and marketing expenses consist primarily of personnel costs, commissions and bonuses, trade shows, marketing programs and other marketing activities, travel, outside consulting costs, and long-term incentive compensation. We expect sales and marketing expenses to increase in absolute dollars as we continue to invest in sales resources in key focus areas, although our sales and marketing expenses may fluctuate as a percentage of total revenue.
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Research and development
. Research and development expenses consist primarily of personnel costs and long-term incentive compensation. We expect research and development expenses to increase in absolute dollars as we continue to invest in our future solutions, although our research and development expenses may fluctuate as a percentage of total revenue.
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General and administrative
. General and administrative expenses consist primarily of personnel costs, legal and other professional fees, and long-term incentive compensation. We expect general and administrative expenses to increase in absolute dollars although our general and administrative expenses may fluctuate as a percentage of total revenue.
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Amortization/impairment of intangible assets
. Acquired intangible assets are amortized over their respective amortization periods. As a result of the Company rebranding, the value of certain intangible assets was written down during 2018, and impairment charges of $0.5 million were recorded for the year ended December 31, 2018.
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Interest Income, Net
Interest income consists of income earned on our cash equivalents and short term investments. Our cash equivalents and short term investments are invested in short-term instruments at current market rates.
Other Income, Net
Other income, net primarily includes exchange gains (losses) on transactions that are denominated in currencies other than our subsidiaries’ functional currencies, subsidies received from foreign governments in support of our research and development in those countries and other miscellaneous non-operational expenses.
Income Taxes
Our effective tax rate reflects our global structure related to the ownership of our intellectual property (“IP”). All our IP in our traditional authentication business is owned by two subsidiaries, one in the U.S. and one in Switzerland. These two subsidiaries have entered into agreements with most of the other OneSpan entities under which those other entities provide services to our U.S. and Swiss subsidiaries on either a percentage of revenue or on a cost plus basis or both. Under this structure, the earnings of our service provider subsidiaries are relatively constant. These service provider companies tend to be in jurisdictions with higher effective tax rates. Fluctuations in earnings tend to flow to the U.S. company and Swiss company. In 2018, earnings flowing to the U.S. company are expected to be taxed at a rate of 21% to 25%, while earnings flowing to the Swiss company are expected to be taxed at a rate ranging from 11% to 12%. Our Canadian subsidiary currently sells and services global customers directly, as does a UK subsidiary.
As the majority of our revenues are generated outside of the U.S., our consolidated effective tax rate is strongly influenced by the effective tax rate of our foreign operations. Changes in the effective rate related to foreign operations reflect changes in the geographic mix of earnings and the tax rates in each of the countries in which it is earned. The statutory tax rate for the primary foreign tax jurisdictions ranges from 11% to 35%.
The geographic mix of earnings of our foreign subsidiaries primarily depends on the level of pretax income of our service provider subsidiaries and the benefit realized in Switzerland through the sales of product. The level of pretax income in our service provider subsidiaries is expected to vary based on:
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1.
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the staff, programs and services offered on a yearly basis by the various subsidiaries as determined by management, or
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2.
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the changes in exchange rates related to the currencies in the service provider subsidiaries, or
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3.
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the amount of revenues that the service provider subsidiaries generate.
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For items 1 and 2 above, there is a direct impact in the opposite direction on earnings of the U.S. and Swiss entities. Any change from item 3 is generally expected to result in a larger change in income in the U.S. and Swiss entities in the direction of the change (increased revenues expected to result in increased margins/pretax profits and conversely decreased revenues expected to result in decreased margins/pretax profits).
In addition to the provision of services, the intercompany agreements transfer the majority of the business risk to our U.S. and Swiss subsidiaries. As a result, the contracting subsidiaries’ pretax income is reasonably assured while the pretax income of the U.S. and Swiss subsidiaries varies directly with our overall success in the market.
In 2015, we acquired OneSpan Canada Inc., a foreign company with substantial IP and net operating loss and other tax carryforwards. The tax benefit of the carryforwards has been fully reserved as realization has not been deemed more likely than not.
In May 2018, we acquired Dealflo, a foreign company with substantial IP and net operating losses. The tax benefit of the loss carryforwards will be reserved to the extent they exceed deferred tax liabilities as the realization has not been deemed more likely than not.
U.S. Tax Reform
On December 22, 2017, the United States enacted U.S. tax reform that included a broad range of business tax provisions, including but not limited to a reduction in the U.S. federal tax rate from 35% to 21% as well as provisions that limit or eliminate various deductions or credits. The legislation also includes a one-time transition tax on accumulated foreign earnings and profits.
In response to the enactment of U.S. tax reform, the SEC issued guidance to address the complexity in accounting for this new legislation. When the initial accounting for items under the new legislation was incomplete, the guidance allowed us to recognize provisional amounts when reasonable estimates can be made or to continue to apply the prior tax law if a reasonable estimate of the impact cannot be made. The SEC provided up to a one-year window for companies to finalize the accounting for the impacts of this new legislation. The accounting for the tax effects of Tax Reform has been completed as of December 31, 2018. Please see Note 7 – Income Taxes for further information.
Results of Operations
The following tables summarize our consolidated results of operations for the periods presented.
Comparison of the Years Ended December 31, 2018 and 2017
As described in Note 4 – Revenue, The Company adopted ASC 606 on January 1, 2018. As a result the Company has changed its accounting policy for revenue recognition. The Company adopted ASC 606 using the modified retrospective method. Therefore, the comparative information has not been adjusted and continues to be reported under ASC 605 and ASC 985-605.
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Years ended December 31,
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Change
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2018
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2017*
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$
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%
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(in thousands)
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Revenue
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Product and license
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$
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152,977
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$
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147,257
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$
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5,720
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4%
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Services and other
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59,303
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46,034
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13,269
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29%
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Total revenue
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$
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212,280
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$
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193,291
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$
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18,989
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10%
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Revenue by geographic region
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EMEA
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$
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103,293
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$
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92,859
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$
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10,434
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11%
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Americas
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54,979
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52,981
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1,998
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4%
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APAC
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54,008
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47,451
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6,557
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14%
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Total revenue
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$
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212,280
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$
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193,291
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$
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18,989
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10%
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*Prior period amounts are presented under ASC 605 and
ASC 985-605.
Total revenue increased $19.0 million or 10%, during the year ended December 31, 2018 compared to the year ended December 31, 2017. Product and license revenue increased by $5.7 million, or 4% during the year ended December 31, 2018. The increase in product and license revenue was primarily due to an increase in software licenses revenue. Higher product and license revenue was partially offset by the $2.4 million impact from the adoption of ASC 606 for the year ended December 31, 2018. Services and other revenue increased by $13.3 million, or 29% during the year ended December 31, 2018. The increase was due to an increase in SaaS and maintenance revenue, as well as a $5.8 million impact of adopting ASC 606 for the year ended December 31, 2018.
Revenue generated in EMEA increased $10.4 million, or 11% during the year ended December 31, 2018. The increase in revenue was primarily driven by an increase in software and maintenance revenue, partially driven by Dealflo.
Revenue generated in the Americas increased $2.0 million, or 4% during the year ended December 31, 2018. The increase in revenue was driven by higher subscription and maintenance revenue.
Revenue generated in the Asia Pacific region increased $6.6 million, or 14% during the year ended December 31, 2018. The increase in revenue was primarily due to an increase in software license revenue.
Cost of Goods Sold and Gross Margin
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Years ended December 31,
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Change
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2018
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2017
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$
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%
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(in thousands)
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Cost of goods sold
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Product and license
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$ 50,706
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$ 48,333
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$ 2,373
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5%
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Services and other
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14,107
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10,444
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3,663
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35%
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Total cost of goods sold
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$ 64,813
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$ 58,777
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$ 6,036
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10%
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Gross profit
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$ 147,467
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$ 134,514
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12,953
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10%
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Gross margin
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Product and license
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67%
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67%
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Services and other
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76%
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77%
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Total gross margin
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69%
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70%
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The cost of product and license revenue increased $2.4 million, or 5% during the year ended December 31, 2018 compared to the year ended December 31, 2017. The increase in cost of product and license revenue was primarily driven by an increase in token costs.
The cost of services and other revenue increased $3.7 million, or 35%, during the year ended December 31, 2018 compared to the year ended December 31, 2017. The increase in cost of services and other revenue was primarily due to increased services and other revenues and increased SaaS hosting fees. Increased software costs from Dealflo contributed $1.0 million of the increase.
Gross profit increased $13.0 million, or 10%, during the year ended December 31, 2018 compared to the year ended December 31, 2017. Gross margin was 69% for the year ended December 31, 2018 and 70% for the year ended December 31, 2017. The decrease in profit margin was driven by lower services and other margins.
The majority of our inventory purchases are denominated in U.S. Dollars. Our sales are denominated in various currencies including the Euro. As the U.S. Dollar strengthened against the Euro for the year ended December 31, 2018 compared to the same period of 2017, revenue from sales made in Euros decreased, as measured in US Dollars, without a corresponding change in the cost of goods sold. The impact of changes in currency rates are estimated to have decreased revenue by approximately $4.1 million for the year ended December 31, 2018. Had currency rates in 2018 been equal to rates in 2017, the gross profit margin would have been approximately 0.4 percentage points lower for the year ended December 31, 2018.
Operating Expenses
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Years ended December 31,
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Change
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2018
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2017
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$
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%
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(in thousands)
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Operating costs
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Sales and marketing
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$
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63,805
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$
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58,994
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$ 4,811
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8%
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Research and development
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32,197
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23,119
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9,078
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39%
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General and administrative
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41,589
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37,400
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4,189
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11%
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Amortization / impairment of intangible assets
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9,852
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8,809
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1,043
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12%
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Total operating costs
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$
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147,443
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$
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128,322
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$ 19,121
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15%
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Sales and Marketing Expenses
Sales and marketing expenses increased $4.8 million, or 8% during the year ended December 31, 2018 compared to the year ended December 31, 2017, primarily due to increased headcount, higher commissions associated with increased sales, and expenses incurred as a result of the Company rebranding.
Average full-time sales and marketing employee headcount for year ended December 31, 2018 was 330, compared to 308 for year ended December 31, 2017. Average headcount in 2018 was 7% higher than in 2017.
Research and Development Expenses
Research and development expenses increased $9.1 million, or 39% during the year ended December 31, 2018 compared to the year ended December 31, 2017. Additional investment in research and development from Dealflo accounted for $4.7 million of costs during the year ended December 31, 2018. The increase in expense was also driven by higher cloud services costs for our test environment and overall increased headcount.
Average full-time research and development employee headcount for year ended December 31, 2018 was 250, compared to 215 for year ended December 31, 2017. Average headcount in 2018 was 16% higher than in 2017.
General and Administrative Expenses
General and administrative expenses increased $4.2 million, or 11% during the year ended December 31, 2018 compared to the year ended December 31, 2017. The increase in general and administrative expenses for the year ended December 31, 2018 was driven by higher professional service fees incurred as a result of the Dealflo acquisition and increased headcount. Offsetting increased costs for the year ended December 31, 2018 was a benefit of $0.9 million attributed to the reversal of an accrual resulting from a favorable outcome in our OFAC matter (see Note 12 – Commitments and Contingencies).
Average full-time general and administrative employee headcount for year ended December 31, 2018 was 105, compared to 91 for the year ended December 31, 2017. Average headcount in 2018 was 15% higher than in 2017.
Amortization / Impairment of Intangible Assets
Amortization / impairment of intangible assets for the year ended December 31, 2018 was $9.9 million, compared to $8.8 million for the year ended December 31, 2017, an increase of $1.1 million or 12%. The increase in expense was driven by additional intangible assets acquired during the second quarter as a result of the Dealflo acquisition, as well as expense recognized for assets that were considered impaired as a result of the rebranding.
Interest Income, net
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Twelve months ended December 31,
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Change
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2018
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2017
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$
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%
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(in thousands)
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Interest income, net
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$ 1,265
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|
$ 1,431
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$ (166)
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-12%
|
Interest income, net was $1.3 million for the year ended December 31, 2018, compared to $1.4 million for the year ended December 31, 2017. The decrease in interest income for 2018 compared to 2017 reflects a decrease in the average invested balance.
Other Income, Net
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Year ended December 31,
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Change
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2018
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2017
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$
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%
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(in thousands)
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Other income, net
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|
$ 2,264
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|
$ 758
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|
$ 1,506
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NM
|
Other income, net primarily includes exchange gains (losses) on transactions that are denominated in currencies other than our subsidiaries’ functional currencies, and subsidies received from foreign governments in support of our research and development in those countries.
Other income, net for the year ended December 31, 2018 was $2.3 million, compared to $0.8 million for the year ended December 31, 2017. The increase in other income, net for the year ended December 31, 2018 was largely driven by the recognition of a $1.2 million government subsidy from a foreign government in support of our advancement of authentication technology and gains resulting from foreign currency transactions.
Provision (Benefit) for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve months ended December 31,
|
|
Change
|
|
|
|
2018
|
|
2017
|
|
$
|
|
%
|
|
|
|
(in thousands)
|
|
|
|
|
|
Provision (benefit) for income taxes
|
|
$ (293)
|
|
$ 30,780
|
|
$ (31,073)
|
|
NM
|
Income tax benefit for 2018 was $0.3 million compared to income tax expense of $30.8 million in 2017. For the year ended December 31, 2018 there was an 8% tax benefit, compared to tax expense of 367% in 2017. The change was primarily due to 2017 U.S. tax reform. See Note 7 – Income taxes.
Our future effective tax rate could be adversely affected by losses generated in jurisdictions where we cannot recognize a tax benefit, earnings being lower than anticipated in countries that have lower statutory rates and higher than anticipated in countries that have higher statutory rates, changes in the valuation of our deferred tax assets or liabilities, or changes in tax laws, regulations, or accounting principles, as well as certain discrete items.
Loss Carryforwards Available
At December 31, 2018, we have gross deferred tax assets of $24.6 million resulting from foreign and state NOL carryforwards of $132.2 million and other foreign deductible carryforwards of $37.0 million. At December 31, 2018, we have a valuation allowance of $15.2 million against deferred tax assets related to certain carryforwards. See Note 7 – Income taxes for more information regarding carryforwards and valuation allowances.
Comparison of the Years Ended December 31, 2017 and 2016
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
Change
|
|
|
|
2017*
|
|
2016*
|
|
|
$
|
|
%
|
|
|
|
(in thousands)
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Product and license
|
$
|
147,257
|
|
|
$
|
156,057
|
|
$
|
(8,800)
|
|
-6%
|
|
Services and other
|
|
46,034
|
|
|
|
36,247
|
|
|
9,787
|
|
27%
|
|
Total revenue
|
$
|
193,291
|
|
|
$
|
192,304
|
|
$
|
987
|
|
1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by geographic region
|
|
|
|
|
|
|
|
|
|
|
|
|
EMEA
|
$
|
92,859
|
|
|
$
|
95,897
|
|
$
|
(3,038)
|
|
-3%
|
|
Americas
|
|
52,981
|
|
|
|
33,204
|
|
|
19,777
|
|
60%
|
|
APAC
|
|
47,451
|
|
|
|
63,203
|
|
|
(15,752)
|
|
-25%
|
|
Total revenue
|
$
|
193,291
|
|
|
$
|
192,304
|
|
$
|
987
|
|
1%
|
*Prior period amounts are presented under ASC 605 and
ASC 985-605.
Total revenue increased $1.0 million or 1%, during the year ended December 31, 2017 compared to the year ended December 31, 2016. Product and license revenue decreased by $8.8 million, or 6% during the year ended December 31, 2017. The decrease in product and license revenue was primarily due to a decrease in hardware revenue offset partially by an increase in software licenses. Services and other revenue increased by $9.8 million, or 27% during the year ended December 31, 2017. The increase was due to an increase in SaaS and maintenance revenue.
Revenue generated in EMEA decreased $3.0 million, or 3% during the year ended December 31, 2017. The decrease in revenue was primarily driven by a decline in our hardware products partially offset by an increase in software licenses.
Revenue generated in the Americas increased $19.8 million, or 60% during the year ended December 31, 2017. The increase in revenue was primarily due to increased revenue from non-hardware products, including eSignLive and security software licenses.
Revenue generated in the Asia Pacific region decreased $15.8 million, or 25% during the year ended December 31, 2017. The decrease in revenue was primarily due to a decline in hardware revenue.
Cost of Goods Sold and Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
Change
|
|
|
|
2017
|
2016
|
|
$
|
|
%
|
|
|
|
(in thousands)
|
|
|
|
|
|
Cost of goods sold
|
|
|
|
|
|
|
|
|
|
Product and license
|
|
$ 48,333
|
|
$ 53,191
|
|
$ (4,858)
|
|
-9%
|
|
Services and other
|
|
10,444
|
|
8,456
|
|
1,988
|
|
24%
|
|
Total cost of goods sold
|
|
$ 58,777
|
|
$ 61,647
|
|
$ (2,870)
|
|
-5%
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$ 134,514
|
|
$ 130,657
|
|
3,857
|
|
3%
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
|
|
|
|
|
|
|
Product and license
|
|
67%
|
|
66%
|
|
|
|
|
|
Services and other
|
|
77%
|
|
77%
|
|
|
|
|
|
Total gross margin
|
|
70%
|
|
68%
|
|
|
|
|
The cost of product and license revenue decreased $4.9 million, or 9% during the year ended December 31, 2017 compared to the year ended December 31, 2016. The decrease in cost of product and license revenue was primarily driven by a decline in our hardware revenue.
The cost of services and other revenue increased $2.0 million, or 24%, during the year ended December 31, 2017 compared to the year ended December 31, 2016. The increase in cost of services and other revenue was primarily due to increased services and other revenues and increased SaaS hosting fees.
Gross profit increased $3.9 million, or 3%, during the year ended December 31, 2017 compared to the year ended December 31, 2016. Gross margin was 70% for the year ended December 31, 2017 and 68% for the year ended December 31, 2016. The increase in gross margin primarily reflects an increase in software solutions as a percentage of total revenues.
The majority of our inventory purchases are denominated in U.S. Dollars. Our sales are denominated in various currencies including the Euro. For the year ended December 31, 2017, as the U.S. Dollar weakened against the Euro compared to the year ended December 31, 2016, revenue from sales in Euros, as measured in U. S. Dollars, increased, without a corresponding change in the cost of goods sold. The impact of changes in currency rates are estimated to have increased revenue by approximately $1.2 million for the full year of 2017. Had currency rates in the full year of 2017 been equal to rates in the same period in 2016, the gross profit margin would have been approximately 0.2 percentage points lower for the full year of 2017.
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
Change
|
|
|
|
|
2017
|
|
2016
|
|
$
|
|
%
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Operating costs
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
$
|
58,994
|
|
$
|
57,347
|
|
$ 1,647
|
|
3%
|
|
Research and development
|
|
|
|
23,119
|
|
|
23,214
|
|
(95)
|
|
0%
|
|
General and administrative
|
|
|
|
37,400
|
|
|
31,648
|
|
5,752
|
|
18%
|
|
Amortization / impairment of intangible assets
|
|
|
|
8,809
|
|
|
8,849
|
|
(40)
|
|
0%
|
|
Total operating costs
|
|
|
$
|
128,322
|
|
$
|
121,058
|
|
$ 7,264
|
|
6%
|
Sales and Marketing Expenses
Sales and marketing expenses increased $1.6 million, or 3% during the year ended December 31, 2017 compared to the year ended December 31, 2016, primarily due to headcount and increased marketing investments.
Average full-time sales, marketing, support, and operating employee headcount for year ended December 31, 2017 was 614, compared to 595 for year ended December 31, 2016. Average headcount in 2017 was 3% higher than in 2016.
Research and Development Expenses
Research and development expenses decreased $0.1 million, or 0% during the year ended December 31, 2017 compared to the year ended December 31, 2016.
Average full-time research and development employee headcount for year ended December 31, 2017 was 215, compared to 225 for year ended December 31, 2016. Average headcount in 2017 was 4% lower than in 2016, partially attributed to the divestiture of a non-strategic business line in August 2017.
General and Administrative Expenses
General and administrative expenses increased $5.8 million, or 18% during the year ended December 31, 2017 compared to the year ended December 31, 2016. The increase in general and administrative expenses for the year ended December 31, 2017 primarily reflect increased headcount, professional fees and facilities expense. Professional fees primarily relate to internal controls, legal and internal systems.
Average full-time general and administrative employee headcount for year ended December 31, 2017 was 91, compared to 82 for year ended December 31, 2016. Average headcount in 2017 was 11% higher than in 2016.
Amortization / Impairment of Intangible Assets
Amortization / impairment of intangible assets expense for the year ended December 31, 2017 was $8.8 million, compared to $8.8 million for the year ended December 31, 2016. There were no significant changes in our amortization of purchased intangible assets for the year ended December 31, 2017 from the year ended December 31, 2016.
Interest Income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve months ended December 31,
|
|
Change
|
|
|
|
|
2017
|
2016
|
|
$
|
|
%
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Interest income, net
|
|
|
$ 1,431
|
|
$ 785
|
|
$ 646
|
|
82%
|
Consolidated net interest income for the year ended December 31, 2017 was $1.4 million, compared to $0.8 million for the year ended December 31, 2016. The increase in interest income for 2017 compared to the 2016 reflects an increase in the average interest rate earned on invested balances and an increase in the average invested balance.
Other Income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
Change
|
|
|
|
|
2017
|
|
2016
|
|
$
|
|
%
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Other income (expense), net
|
|
|
$ 758
|
|
$ 993
|
|
$ (235)
|
|
-24%
|
Other income, net for the year ended December 31, 2017 was $0.8 million, compared to $1.0 million for the year ended December 31, 2016. Other income (expense), net included exchange losses of $0.5 million for the year ended December 31, 2017 compared to exchange gains of $0.1 million for the year ended December 31, 2016.
Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve months ended December 31,
|
|
Change
|
|
|
|
2017
|
|
2016
|
|
$
|
|
%
|
|
|
|
(in thousands)
|
|
|
|
|
|
Provision (benefit) for income taxes
|
|
$ 30,780
|
|
$ 863
|
|
$ 29,917
|
|
NM
|
Income tax expense for 2017 was $30.8 million, compared to $0.9 million in 2016. The effective tax rate in 2017 was 367%, compared to 8% in 2016. The increase in the rate is primarily due to the repatriation tax, change in permanently reinvested assertion, and tax rate change on deferred tax assets described in Note 7.
Our future effective tax rate will be affected by U.S. tax reform. Effective in 2018, the U.S. statutory tax rate decreases from 35% to 21% and creates new taxes on certain foreign-sourced earnings which are referred to as the global intangible low-taxed income tax (“GILTI”).
Loss Carryforwards Availabl
e
At December 31, 2017, we have deferred tax assets of $21.7 million resulting from foreign and state NOL carryforwards of $120.5 million and other foreign deductible carryforwards of $31.2 million. At December 31, 2017, we have a valuation allowance of $12.8 million against deferred tax assets related to certain carryforwards. See Note 7 – Income Taxes for more information regarding carryforwards and valuation allowances
Liquidity and Capital Resources
As of December 31, 2018, we had net cash balances (total cash and cash equivalents) of $76.7 million and short-term investments of $22.8 million.. Short term investments consist of U.S. treasury bills and notes, corporate notes, and high quality commercial paper with maturities at acquisition of more than three months and less than twelve months. During the year ended December 31, 2018, we entered into a new lease agreement that required a letter of credit in the amount of $0.8 million to secure the obligation. The restricted cash related to this letter of credit is recorded in other non-current assets on the Consolidated Balance Sheet. We had no restricted cash at December 31, 2017. We had no outstanding debt at December 31, 2018 or December 31, 2017.
Our working capital at December 31, 2018 was $119.6 million, a decrease of $42.2 million or 26% from $161.8 million at December 31, 2017. The decrease in the combined balance of our cash and short-term investments is primarily driven by the cash purchase of Dealflo on May 30, 2018.
As of December 31, 2018, we held $69.1 million of cash and cash equivalents in subsidiaries outside of the United States. Of that amount, $68.2 million is not subject to repatriation restrictions, but may be subject to taxes upon repatriation.
We believe that our financial resources are adequate to meet our operating needs over the next twelve months.
Our cash flows are as follows:
|
|
|
|
|
|
|
|
|
|
|
Twelve months ended December 31,
|
|
|
|
2018
|
2017
|
|
2016
|
|
|
|
(in thousands)
|
|
Cash provided by (used in):
|
|
|
|
|
|
|
|
Operating activities
|
|
$ 1,226
|
|
$ 17,627
|
|
28,415
|
|
Investing activities
|
|
194
|
|
12,798
|
|
(56,496)
|
|
Financing activities
|
|
(970)
|
|
(640)
|
|
(1,051)
|
|
Effect of foreign exchange rate changes on cash and cash equivalents
|
|
(1,556)
|
|
(469)
|
|
(45)
|
Operating Activities
Cash generated by operating activities is primarily comprised of net income, as adjusted for non-cash items, and changes in operating assets and liabilities. Non-cash adjustments consist primarily of amortization and impairment of intangible assets, depreciation of property and equipment, and stock-based compensation. We expect cash inflows from operating activities to be affected by increases or decreases in sales and timing of collections. Our primary uses of cash from operating activities have been for personnel costs. We expect cash outflows from operating activities to be affected by increases in personnel cost as we grow our business.
For the year ended December 31, 2018, $1.2 million of cash was provided by operating activities. Cash of $17.6 million and $28.4 million was provided by operating activities for the years ended December 31, 2017 and 2016, respectively.
Investing Activities
The changes in cash flows from investing activities primarily relate to timing of purchases, maturities and sales of investments, purchases of property and equipment, and activity in connection with acquisitions. We expect to continue to purchase property and equipment to support the continued growth of our business as well to continue to invest in our infrastructure and activity in connection with acquisitions.
For the years ended December 31, 2018 and December 31, 2017, cash of $0.2 million and $12.8 million, respectively, was provided by investing activities. Cash of $56.5 million was used in investing activities during the year ended December 31, 2016.
Financing Activities
The changes in cash flows from financing activities primarily relate to tax payments for restricted stock issuances.
Cash of $1.0 million, $0.6 million and $1.1 million was used in financing activities during the years ended December 31, 2018, 2017 and 2016, respectively.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
Contractual Obligations and Commitments
The following summarizes our contractual obligations and commitments as of December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period
|
|
|
|
|
|
|
|
|
|
2-3
|
|
4-5
|
|
More than
|
|
|
|
Total
|
|
1 year
|
|
years
|
|
years
|
|
5 years
|
|
Operating lease obligations
|
|
$
|
22,624
|
|
$
|
3,817
|
|
$
|
5,752
|
|
$
|
4,185
|
|
$
|
8,870
|
|
Purchase obligations
|
|
|
34,294
|
|
|
24,320
|
|
|
9,974
|
|
|
—
|
|
|
—
|
|
Taxes payable
|
|
|
8,673
|
|
|
1,053
|
|
|
2,109
|
|
|
3,027
|
|
|
2,484
|
|
|
|
$
|
65,591
|
|
$
|
29,190
|
|
$
|
17,835
|
|
$
|
7,212
|
|
$
|
11,354
|
The operating lease obligations above do not include common area maintenance (“CAM”) charges or real estate taxes under our operating leases, for which the Company is also obligated. These charges are generally not fixed and can fluctuate from year to year.
Taxes payable represents deemed repatriation tax from 2017. For further information, refer to Note 7 – Income Taxes.
The Company had $0.4 million and $0.1 million of unrecognized tax benefits as of December 31, 2018 and 2017, which have been set aside in a reserve in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740 Income Taxes. These amounts are not included in the above table as the timing of payment of such obligations, if any, is not determinable.
Critical Accounting Policies and Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period.
On an on-going basis, management evaluates its estimates and judgments, including those related to bad debts, net realizable value of inventory and intangible assets. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies affect significant judgments and estimates used in the preparation of its consolidated financial statements.
Revenue Recognition
Under ASC 605 – For the Years ended December 31, 2017 and 2016
Prior to January 1, 2018 we recognized revenue in accordance
with ASC 985-605,
Software – Revenue Recognition
, ASC 985-605-25,
Revenue Recognition – Multiple Element Arrangements
and Staff Accounting Bulletin 104.
Product and License Revenue includes hardware products and software licenses. Services and Other includes software as a service (“SaaS”), maintenance and support, and professional services.
Revenue is recognized when there is persuasive evidence that an arrangement exists, delivery has occurred, the fee is fixed or determinable and collection of the revenue is probable.
In multiple-element arrangements, some of our products are accounted for under the software provisions of ASC 985-605 and others under the provisions that relate to the sale of non-software products.
In our typical multiple-element arrangement, the primary deliverables include:
1.
a client component (i.e., an item that is used by the person being authenticated in the form of either a new standalone hardware device or software that is downloaded onto a device the customer already owns);
2.
host system software that is installed on the customer’s systems (i.e., software on the host system that verifies the identity of the person being authenticated) or licenses for additional users on the host system software if the host system software had been installed previously; and
3.
post contract support (PCS) in the form of maintenance on the host system software or support.
Our multiple-element arrangements may also include other items that are usually delivered prior to the recognition of any revenue are incidental to the overall transaction such as initialization of the hardware device, customization of the hardware device itself or the packaging in which it is delivered, deployment services where we deliver the device to our customer’s end-use customer or employee and, in some limited cases, professional services to assist with the initial implementation of a new customer.
In multiple-element arrangements that include a hardware client device, we allocate the selling price among all elements, delivered and undelivered, based on our internal price lists and the percentage of the selling price of that element, per the price list, to the total of the estimated selling price of all of the elements per the price list. Our internal price lists for both delivered and undelivered elements were determined to be reasonable estimates of the selling price of each element based on a comparison of actual sales made to the price list. In multiple-element arrangements that include a software client device, we continue to account for each element under the current standards of ASC 985-605 related to software. When software client device and host software are delivered elements, we use the Residual Method for determining the amount of revenue to recognize for token and software licenses if we have vendor-specific objective evidence (“VSOE”) for all of the undelivered elements. Any discount provided to the customer is applied fully to the delivered elements in such an arrangement. VSOE for undelivered elements is established using the “bell curve method.” Under this method, we conclude VSOE exists when a substantial majority of PCS renewals are within a narrow range of pricing. The estimated selling price of PCS items is based on an established percentage of the user license fee attributable to the specific software. In sales arrangements where VSOE of fair value has not been established, revenue for all elements is deferred and amortized over the life of the arrangement.
For transactions other than multiple-element arrangements, we recognize revenue as follows:
1.
Product and License Revenue
: Revenue from the sale of computer security hardware or the license of software is recorded upon shipment or, if an acceptance period is allowed, at the latter of shipment or customer acceptance. No significant obligations or contingencies exist with regard to delivery, customer acceptance or rights of return at the time revenue is recognized.
2.
SaaS
: We generate SaaS revenues from our cloud services offerings. SaaS revenues include fees from customers for access to the OneSpan Sign (formerly eSignLive) suite of solutions. Our standard customer arrangements generally do not provide the customer with the right to take possession of the software supporting the cloud-based application service at any time. As such, these arrangements are considered service contracts and revenue is recognized ratably over the service period of the contract.
3.
Maintenance and Support Agreements
: Maintenance and support agreements generally call for us to provide software updates and technical support, respectively, to customers. Revenue on maintenance and technical support is deferred and recognized ratably over the term of the applicable maintenance and support agreement.
4.
Professional Services
: We provide professional services to our customers. Revenue from such services is recognized during the period in which the services are performed.
We recognize revenue from sales to distributors and resellers on the same basis as sales made directly to customers. We recognize revenue when there is persuasive evidence that an arrangement exists, delivery has occurred, the fee is fixed or determinable and collection of the revenue is probable.
For large-volume transactions, we may negotiate a specific price that is based on the number of users of the software license or quantities of hardware supplied. The per unit prices for large-volume transactions are generally lower than transactions for smaller quantities and the price differences are commonly referred to as volume-purchase discounts.
All revenue is reported on a net basis, excluding any sales taxes or value added taxes.
Under ASC 606 – For the year ended December 31, 2018
On January 1, 2018, we adopted Accounting Standards Update No. 2014-09
“Revenue from Contracts with Customers”
(FASB Accounting Standards Codification (ASC) Topic 606, or “Topic 606”) using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under FASB ASC Topic 605 “
Revenue Recognition
” and FASB ASC Topic 985-605 “
Software-Revenue Recognition
” (“Topic 605”). We recorded a net increase to opening Accumulated Income of $11.9 million, net of tax, as of January 1, 2018 due to the cumulative impact of adopting Topic 606, with the impact primarily related to the accounting impacts of our customer contracts that include a term license to our software, as well as the impact of accounting for costs incurred to obtain our contracts. The net impact to revenue as a result of applying Topic 606 was an increase of $3.4 million for the year ended December 31, 2018. See Note 4 - Revenue for further details. We determine revenue recognition through the following steps:
|
|
|
|
|
|
|
·
|
|
Identification of the contract, or contracts, with a customer;
|
|
|
·
|
|
Identification of the performance obligations in the contract;
|
|
|
·
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Determination of the transaction price;
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Allocation of the transaction price to the performance obligations in the contract; and
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Recognition of revenue when, or as, we satisfy a performance obligation.
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Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those products or services, which excludes any sales incentives and amounts collected on behalf of third parties. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of goods sold.
Nature of Goods and Services
We derive our revenues primarily from Product and License Revenue, which includes hardware products and software licenses, and Services and Other, which is inclusive of software-as-a-service (which we refer to as “subscription”, or “SaaS”), maintenance and support, and professional services.
Product Revenue:
Revenue from the sale of security hardware is recorded upon shipment, which is the point at which control of the goods are transferred and the completion of the performance obligations, unless there are specific terms that would suggest control is transferred at a later date (e.g. delivery). No significant obligations or contingencies typically exist with regard to delivery, customer acceptance or rights of return at the time revenue is recognized. Customer payments normally correspond with delivery.
License Revenue:
Revenue from the sale of software licensing is recorded upon the latter of when the customer receives the ability to access the software or when they are legally allowed to use the software. No significant obligations or contingencies exist with regard to delivery, customer acceptance or rights of return at the time revenue is recognized. Contracts with customers for distinct licenses of intellectual property include perpetual licenses, which grant the customer unlimited access to the software, and term licenses which limit the customer’s access to the software to a specific time period. The typical term license length is three years. Customer payments normally correspond with delivery for perpetual licenses. For term licenses, payments are either on installment or in advance. In limited circumstances, we integrate third party software solutions into our software products. We have determined that, consistent with our conclusion under prior revenue recognition rules, generally we act as the principal with respect to the satisfaction of the related performance obligation and record the corresponding revenue on a gross basis from these transactions. For transactions in which we do not act as the principal, we would recognize revenue on a net basis. The fees paid to the third parties are recognized as a component of cost of goods sold when the revenue is recognized.
Subscription Revenue:
We generate subscription revenues from our cloud services offerings. Subscription revenues mostly include fees from customers for access to the OneSpan Sign and Dealflo solutions. Our standard customer arrangements do not provide the customer with the right to take possession of the software supporting the cloud-based application service at any time. As such, these arrangements are considered service contracts and revenue is recognized ratably over the service period of the contract. Customer payments are normally in advance for annual service.
Maintenance, Support and Other:
Maintenance and support agreements generally call for us to provide software updates and technical support, respectively, to customers. Revenue on maintenance and technical support is deferred and recognized ratably over the term of the maintenance and support agreement. Customer payments are normally in advance for annual service.
Professional Services:
We provide professional services to our customers. Revenue from such services is recognized during the period in which the services are performed. Payments vary, but normally occur on a time and materials basis.
Significant Judgments
We enter into contracts to deliver a combination of hardware devices, software licenses, subscriptions, maintenance and support and, in some situations, professional services. These Company evaluates the nature of the goods or services promised in these arrangements to identify the distinct performance obligations. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. When a hardware client device and licenses to host software are sold in a contract, they are treated as a single performance obligation because the software license is deemed to be a component of the hardware that is integral to the functionality of the hardware that is used by our customers for identity authentication. When a software client device is sold in a contract host software, the licenses are considered a single performance obligation to deliver the authentication solution to the customer. In either of these types of arrangements, maintenance and support and professional services are typically distinct separate performance obligations from the hardware or software solutions. Our contracts to deliver subscription services typically do not include multiple performance obligations; however, in certain limited cases customers may purchase professional services that are distinct performance obligations.
For contracts that contain multiple performance obligations, the transaction price is allocated to the separate performance obligations based on their estimated relative standalone selling price. Judgment is required to determine the stand-alone selling price (“SSP”) of each distinct performance obligation. We determine SSP for maintenance and support and professional services based on observable inputs; specifically, the range of prices charged to customers to renew annual maintenance and support contracts and the range of hourly rates we charge our customers in standalone professional services contracts. In instances where SSP is not directly observable, and when we sell at a highly variable price range, such as for transactions involving software licenses or subscriptions, we determine the SSP for those performance obligations using the residual method.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make payments for goods and services. We analyze accounts receivable, customer creditworthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. The allowance is based on a specific review of all significant past-due accounts. If the financial condition of our customers deteriorates, resulting in an impairment of their ability to make payments, additional allowances may be required.
Net Realizable Value of Inventory
We write down inventory where it appears that the carrying cost of the inventory may not be recovered through subsequent sale of the inventory. We analyze the quantity of inventory on hand, the quantity sold in the past year, the anticipated sales volume in the form of sales to new customers as well as sales to previous customers, the expected sales price and the cost of making the sale when evaluating the valuation of our inventory. If the sales volume or sales price of a specific model declines significantly, additional write-downs may be required.
Impairment of Long-Lived and Intangible Assets
Definite-lived intangible assets include proprietary technology, customer relationships, and other intangible assets. Intangible assets other than patents with definite lives are amortized over the useful life, generally three to seven years for proprietary technology and five to twelve years for customer relationships. Patents are amortized over the life of the patent, generally 20 years in the U.S. Intangible assets arising from business combinations, such as acquired technology, customer relationships, and other intangible assets, are originally recorded at fair value. As a result of the Company rebranding, the value of certain intangible assets were written down during the second quarter of 2018, and impairment charges of $0.5 million were recorded for the year ended December 31, 2018.
Long-lived assets, including property, plant and equipment, definite-lived intangible assets being amortized and capitalized software costs, are reviewed for impairment whenever events or changes in circumstances indicate that the
carrying amount of the long-lived asset group may not be recoverable. An impairment loss shall be recognized if the carrying amount of a long-lived asset group exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If it is determined that an impairment loss has occurred, the loss is measured as the amount by which the carrying amount of the long-lived asset group exceeds its fair value. Long-lived assets held for sale are reported at the lower of carrying value or fair value less cost to sell.
Goodwill
Goodwill represents the excess of purchase price over the fair value of net identifiable assets acquired in a business combination. We assess the impairment of goodwill each November or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Company’s impairment assessment begins with a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. The qualitative assessment includes comparing the overall financial performance of the reporting units against the planned results used in the last quantitative goodwill impairment test. Additionally, each reporting unit’s fair value is assessed in light of certain events and circumstances, including macroeconomic conditions, industry and market considerations, cost factors, and other relevant entity- and reporting unit specific events. The selection and assessment of qualitative factors used to determine whether it is more likely than not that the fair value of a reporting unit exceeds the carrying value involves significant judgments and estimates. If it is determined under the qualitative assessment that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then a two-step quantitative impairment test is performed. Under the first step, the estimated fair value of the reporting unit is compared with its carrying value (including goodwill). If the fair value of the reporting unit exceeds its carrying value, step two does not need to be performed. If the estimated fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the enterprise must perform step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation in acquisition accounting. The residual amount after this allocation is the implied fair value of the reporting unit goodwill. Fair value of the reporting unit under the two-step assessment is determined using a combination of both income and market-based variation approaches. The inputs and assumptions to valuation methods used to estimate the fair value of reporting units involves significant judgments.
We have not recognized any impairments to goodwill for the years ended December 31, 2018, 2017 or 2016.
Income Taxes
As a global company, we calculate and provide for income taxes in each tax jurisdiction in which we operate. The provision for income taxes includes the amounts payable or refundable for the current year, the effect of deferred taxes and impacts from uncertain tax positions. Our provision for income taxes is significantly affected by shifts in the geographic mix of our pre-tax earnings across tax jurisdictions, changes in tax laws and regulations, and tax planning opportunities available in each tax jurisdiction.
Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statement and tax bases of our assets and liabilities and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates that will apply to taxable income in the years in which those differences are expected to be recovered or settled. Valuation allowances are established for deferred tax assets when it is more likely than not that a tax benefit will not be realized. We recognize the effect of a change in tax rates on deferred tax assets and liabilities and in income in the period that includes the enactment date.
We recognize tax benefits for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed in our income tax returns that do not meet these recognition and measurement standards. Assumptions, judgments, and the use of estimates are
required in determining whether the “more likely than not” standard has been meet when developing the provision for income taxes.
We monitor for changes in tax laws and reflect the impacts of tax law changes in the period of enactment. In response to the U.S. tax reform legislation enacted on December 22, 2017, the U.S. Securities and Exchange Commission (“SEC”) issued guidance that allowed us to record provisional amounts for the impacts of U.S. tax reform.
Due to the timing of the enactment and the complexity involved in applying the provisions of Tax Reform, we made reasonable estimates of the effects and recorded provisional amounts in our financial statements as of December 31, 2017. As we collected and prepared necessary data, and interpreted the additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, we made adjustments, over the course of the year, to the provisional amounts, including refinements to deferred taxes. The accounting for the tax effects of Tax Reform has been completed as of December 31, 2018.
See Note 7 - Income Taxes, for additional information on how we recorded the impacts of the U.S. tax reform
Recently Issued Accounting Pronouncements
Effective January 1, 2018, we adopted ASU 2016-01, which revises the classification and measurement of investments in equity securities. ASU 2016-01 requires that equity investments, except those accounted for under the equity method of accounting, be measured at fair value and changes in fair value are recognized in net income. ASU 2016-01 also provides a new measurement alternative for equity investments that do not have a readily determinable fair value (cost method investments). These investments are measured at cost, less any impairment, adjusted for observable price changes. Effective January 1, 2018, we elected to record our equity investments that do not have a readily determinable fair value using the alternative measurement method. Accordingly upon adoption, we recorded a cumulative effect adjustment to increase opening accumulated income at January 1, 2018 by $0.5 million, net of tax, as required for our equity investments with no readily determinable fair value to reflect these investments at approximate fair value.
In February 2016, the FASB issued ASU No. 2016-02,
Leases
which supersedes ASC Topic 840,
Lease
s, and creates a new topic, ASC Topic 842,
Leases
. Since that date, the FASB has issued additional ASUs clarifying certain aspects of ASU 2016-02. The guidance requires a lessee to recognize a liability to make lease payments and a right-of-use asset representing its rights to use the underlying asset for the lease term for both finance and operating leases. This guidance is effective for us on January 1, 2019. As part of adoption, we reviewed our active lease contracts as of December 31, 2018, and reviewed other contracts for potential embedded leases. We selected a solution and are establishing new processes and internal controls to address the standard.
We will adopt this guidance in the first quarter of 2019 using the optional transition method in which we recognize a cumulative effect adjustment of adopting the standard in the period of adoption without restating the prior periods shown. We plan to elect the package of practical expedients that allows us to not reassess (1) whether contracts are or contain leases, (2) lease classification; and (3) initial direct costs for existing leases. We do not plan on applying the hindsight expedients that would allow us to reassess lease terms and impairments of exiting leases. Upon adoption, we expect to record a right of use asset and a corresponding lease liability for our operating leases. The potential impact on our consolidated financial statements is largely based on the present value of future minimum lease payments, the amount of which will depend upon the population of leases in effect at the date of adoption. Future minimum lease payments totaled $22.6 million as of December 31, 2018, as disclosed in Note 12 – Commitments and Contingencies. We expect the adoption of this standard will have a material impact on our Consolidated Financial Statements.
In November 2016, the FASB issued ASU No. 2016-18,
Statement of Cash Flows: Restricted Cash (Topic 230)
. This ASU requires that a statement of cash flows explain the change during the period in the total of cash, and cash equivalents, including amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. This ASU was effective for us in the first quarter of fiscal 2018. Adoption is required on a retrospective transition basis. The Company recorded $0.8 million of restricted cash for the year ended December 31,
2018 as part of total cash, cash equivalents and restricted stock when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flow. The restricted cash is recorded in other assets on the balance sheet as of December 31, 2018. The Company did not have any restricted cash or restricted cash equivalents for the years ended December 31, 2017 and December 31, 2016.
In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (ASC 230) – Classification of Certain Cash Receipts and Cash Payments
. This guidance clarifies eight specific cash flow issues in an effort to reduce diversity in practice in how certain transactions are classified within the statement of cash flows. We adopted this ASU on January 1, 2018 on a retrospective basis; however, the impact was not material to our consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16,
Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory
. The new guidance is intended to simplify the accounting for intercompany asset transfers. The core principle requires an entity to immediately recognize the tax consequences of intercompany asset transfers. We adopted this standard on January 1, 2018 on a prospective basis. The impact was not material to our consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01,
Business Combinations – Clarifying the Definition of a Business
. This standard changes the definition of a business by requiring that at least one substantive process exist in the acquired entity. It also states that if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, then the set of transferred assets and activities is not a business. We adopted the standard on January 1, 2018 on a prospective basis. The adoption of this standard did not have a material impact on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, I
ntangibles-Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment
. This standard eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge (i.e. Step 2 of the current guidance), instead measuring the impairment charge as the excess of the reporting unit's carrying amount over its fair value (i.e. Step 1 of the current guidance). The guidance is effective for us beginning in the first quarter of 2020, and should be applied prospectively. Early adoption is permitted for impairment testing dates after January 1, 2017. We are currently evaluating the effect, if any, that the ASU will have on our consolidated financial statements and related disclosures.
In March 2017, the FASB issued ASU No. 2017-07,
Compensation - Retirement Benefits (ASC 715) - Improving the Presentation of Net Periodic Pension Costs and Net Periodic Postretirement Benefit Cost
. The new guidance will improve the presentation of pension cost by providing additional guidance on the presentation of net benefit cost in the income statement and on the components eligible for capitalization in assets. The core principle of the ASU is to provide more transparency in the presentation of these costs by requiring the service cost component to be reported in the same line item as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented separately from the service cost component and outside a subtotal of income from operations. The amendments require that the Consolidated Statements of Income impacts be applied retrospectively, while Balance Sheet changes should be applied prospectively. The ASU is effective for annual reporting periods, including interim periods within those annual periods, beginning after December 15, 2017. The adoption of the standard did not have a material impact, and therefore we did not retrospectively reclass prior years’ expense.
We adopted Accounting Standard Update, or ASU, 2018-02,
Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
, in the first quarter of 2018. The ASU allows for the reclassification of stranded tax effects on items resulting from the Tax Cuts and Jobs Act, or the 2017 Tax Act, from accumulated other comprehensive income, or AOCI, to retained earnings. Tax effects unrelated to the 2017 Tax Act are released from AOCI using either the specific identification approach or the portfolio approach based on the nature of the underlying item. We elected not to reclassify the income tax effects of the 2017 Tax Act.
In March 2018, the FASB issued ASU 2018-05, In
come Taxes (Topic 740), Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118
. The ASU adds various Securities and Exchange Commission (“SEC”) paragraphs pursuant to the issuance of the December 2017 SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) (“Tax Cuts and Jobs Act”), which was effective immediately. The SEC issued SAB 118 to address concerns about reporting entities’ ability to timely comply with the accounting requirements to recognize all of the effects of the Tax Cuts and Jobs Act in the period of enactment. SAB 118 allowed disclosure that timely determination of some or all of the income tax effects from the Tax Cuts and Jobs Act was incomplete by the due date of the 2017 financial statements and if possible to provide a reasonable estimate. We accounted for the tax effects of the Tax Cuts and Jobs Act under the guidance of SAB 118 on a provisional basis at December 31, 2017. As of December 31, 2018, our accounting for the Tax Cuts and Jobs Act is complete.
In June 2018, the FASB issued ASU 2018-07,
Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee share-based payment accounting
, which is intended to reduce the cost and complexity of accounting for, and improve financial reporting for share-based payments to nonemployees for goods and services. The ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2018. The guidance should be applied prospectively and early adoption is permitted. We are currently evaluating the effect, if any, that the ASU will have on our consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU No. 2018-13,
Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”)
which amends ASC 820, Fair Value Measurement. ASU 2018-13 modifies the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2019, with early adoption permitted for removed or modified disclosures, and delayed adoption of the additional disclosures until their effective date. We are currently evaluating the effect that the ASU will have on our consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU 2018-14,
Compensation—Retirement Benefits—Defined Benefit Plans—General (Topic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans (ASU 2018-14)
, which modifies the disclosure requirements for defined benefit pension plans and other postretirement plans. ASU 2018-14 is effective for fiscal years ending after December 15, 2020, and earlier adoption is permitted. We are currently evaluating the effect that the ASU will have on our consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU 2018-15,
Customer's Accounting for Fees Paid in a Cloud Computing Arrangement
, which helps entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (CCA) by providing guidance for determining when an arrangement includes a software license and when an arrangement is solely a hosted CCA service. Under ASU 2018-15, customers will apply the same criteria for capitalizing implementation costs as they would for an arrangement that has a software license. The new guidance also prescribes the balance sheet, income statement, and cash flow classification of the capitalized implementation costs and related amortization expense, and requires additional quantitative and qualitative disclosures. The new standard is effective for us on January 1, 2020. Early adoption is permitted, including adoption in any interim period for which financial statements have not been issued. Entities can choose to adopt the new guidance prospectively to eligible costs incurred on or after the date this guidance is first applied or retrospectively . We are currently evaluating the effect that the ASU will have on our consolidated financial statements and related disclosures.
From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that are adopted by us as of the specified effective date. Unless otherwise discussed, our management believes that the impact of recently issued standards that are not yet effective will not have a material impact on our consolidated financial statements upon adoption.
Item 7A -
Quantitative and Qualitative Disclosures about Market Risk (In thousands)
Foreign Currency Exchange Risk
– In 2018, approximately 74% of our business was conducted outside the United States, primarily in Europe, Latin America and Asia/Pacific. A significant portion of our business operations is
transacted in foreign currencies. As a result, we have exposure to foreign exchange fluctuations. We are affected by both foreign currency translation and transaction adjustments. Translation adjustments result from the conversion of the foreign subsidiaries’ balance sheets and income statements to U.S. Dollars at year-end exchange rates and weighted average exchange rates, respectively. Translation adjustments resulting from this process are recorded directly into stockholders’ equity. Transaction adjustments result from currency exchange movements when one of our companies transacts business in a currency that differs from its local currency. These adjustments are recorded as gains or losses in our statements of operations. Our business transactions are spread across numerous countries and currencies. This geographic diversity reduces the risk to our operating results. As noted in Management’s Discussion and Analysis above, we attempt to minimize the net impact of currency on operating earnings by denominating an amount of billings in a currency such that it would provide a hedge against the operating expenses being incurred in that currency.
Interest Rate Risk –
We have minimal interest rate risk. We had no debt outstanding at December 31, 2018. Our cash, cash equivalents, and short term investments are invested in short-term instruments at current market rates. If rates were to increase or decrease by one percentage point, the Company’s interest income would increase or decrease approximately $0.8 million annually.
Impairment Risk –
At December 31, 2018, we had goodwill of $91.8 million and other intangible assets of $45.5 million, primarily from acquisitions including Dealflo in 2018, eSignLive in 2015, Risk IDS in 2014, CRONTO in 2013, and other prior acquisitions. We assess the recoverability of goodwill at least annually, and the recoverability of other intangible assets whenever events or circumstances change indicating the carrying value may not be recoverable. As a result of the Company rebranding, the value of certain intangible assets was written down during the second quarter of 2018, and impairment charges of $0.5 million were recorded for the year ended December 31, 2018. For the year ended December 31, 2017 and 2016, we did not incur any impairments.
Item 8 -
Financial Statements and Supplementary Data
The information in response to this item is included in our consolidated financial statements, together with the report thereon of KPMG LLP, appearing on pages F‑1 through F‑29 of this Form 10‑K, and in Item 7 under the heading Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Item 9 -
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A -
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, who, respectively, are our principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of December 31, 2018. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure (i) information required to be disclosed by us in our reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (ii) information required to be disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that due to the material weakness in our internal control over financial reporting described below in the Management’s Report on Internal Control Over Financial Reporting, our disclosure controls and procedures were not effective as of December 31, 2018.
Management’s Annual Report on Internal Control over Financial Reporting
The management of OneSpan Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
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Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
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Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
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Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
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A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim consolidated financial statements will not be prevented or detected on a timely basis. A deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis.
Our management, led by our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of internal control over financial reporting as of December 31, 2018, using the criteria set forth in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO 2013 Framework). Management’s evaluation of our internal control over financial reporting determined that the Company’s internal control over financial reporting was not effective based on those criteria as of December 31, 2018, due to the material weakness described below.
Management has identified the following control deficiencies in our internal control over financial reporting as of December 31, 2018:
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We did not maintain a sufficient complement of trained, knowledgeable resources (i) to support the adoption of the new revenue accounting standard (ASC Topic 606) and (ii) to execute their responsibilities with respect to internal control over financial reporting over several financial statement accounts and disclosures.
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We did not conduct an effective continuous risk assessment process that was responsive to the adoption of ASC Topic 606 and other changes in the Company’s operating environment.
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As a consequence, the Company did not design, implement and operate effective process-level control activities over the majority of the asset, liability, equity, revenue and operating expense accounts reported in the consolidated financial statements as well as operating cash flows and financial statement disclosures around revenue.
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These control deficiencies led to immaterial misstatements in many of the aforementioned accounts and disclosures, some of which were corrected by the Company prior to the issuance of the December 31, 2018 consolidated financial statements. Furthermore, these control deficiencies create a reasonable possibility that material misstatements to our consolidated financial statements will not be prevented or detected on a timely basis, and therefore we concluded they represent a material weakness and our internal control over financial reporting was not effective as of December 31, 2018.
The Company acquired Dealflo Limited in May 2018. Management excluded Dealflo Limited from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018. Dealflo Limited represented 2% and 2% of the Company’s total assets and total revenues, respectively, as of and for the year ended December 31, 2018.
Our independent registered public accounting firm, KPMG LLP, has issued an adverse report on the effectiveness of our internal control over financial reporting. This report is included on page 55 of this annual report on Form 10-K.
Changes in Internal Control over Financial Reporting
Except for the identification of the material weakness described above, there have been no changes in the Company’s internal control over financial reporting during the quarter ended December 31, 2018, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Remediation Plan
During the three months ended December 31, 2018, the Company initiated its remediation plan related to the material weakness that was identified in 2018 as described above in Management’s Annual Report on Internal Control over Financial Reporting. To remediate the material weakness, we:
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Have hired, and plan to continue hiring, additional accounting personnel with the requisite technical knowledge with respect to revenue recognition and internal control over financial reporting and, in addition, will consider use of third party resources to ensure we have a sufficient complement of resources;
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Will conduct an expanded training program for our new and existing personnel on internal control over financial reporting and accounting for revenue recognition;
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Management will complete the implementation of a new comprehensive worldwide enterprise resource planning (ERP) system, effective January 1, 2019. The new ERP system will improve and enhance the Company’s processes by increasing the level of automation, which is expected improve the efficiency and effectiveness of certain financial reporting and business processes;
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Design, implement and operate effective process-level controls throughout each of the processes in which there were ineffectively designed and implemented controls during 2018; and
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Design and implement an effective continuous risk assessment processes to monitor changes that could significantly impact our internal control over financial reporting.
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The material weakness will be considered remediated when management concludes that, through testing, the applicable remedial controls are designed and implemented effectively. We expect remediation of the material weakness will be completed in fiscal year 2019.
Limitations on the Effectiveness of Controls
Internal control over financial reporting has inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements will not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
OneSpan Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited OneSpan Inc. and subsidiaries’
(the Company), formerly VASCO Data Security International, Inc., internal control over financial reporting as of December 31, 2018, based on criteria established in
Internal Control – Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, because of the effect of the material weakness, described below, on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2018, based on criteria established in
Internal Control – Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2018, and the related notes and financial statement schedule II – Valuation and Qualifying Accounts (collectively, the consolidated financial statements), and our report dated March 15, 2019, expressed an unqualified opinion on those consolidated financial statements.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. A material weakness related to an insufficient complement of trained, knowledgeable resources and an ineffective continuous risk assessment process resulting in ineffective process-level control activities over the majority of the asset, liability, equity, revenue and operating expense accounts reported in the consolidated financial statements as well as operating cash flows and financial statement disclosures around revenue has been identified and included in management’s assessment. The material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2018 consolidated financial statements, and this report does not affect our report on those consolidated financial statements.
The Company acquired Dealflo Limited in May 2018. Management excluded Dealflo Limited from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018. Dealflo Limited represented 2% and 2% of the Company’s total assets and total revenues, respectively, as of and for the year ended December 31, 2018.
Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of Dealflo.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting in Item 9A: Controls and Procedures. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Disclaimer on Additional Information in Management’s Report
We do not express an opinion or any other form of assurance on management’s statements, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting in Item 9A: Controls and Procedures, referring to corrective actions taken after December 31, 2018, relative to the aforementioned material weakness in internal control over financial reporting.
/s/ KPMG LLP
Chicago, Illinois
March 15, 2019
PART III
Item 10 -
Directors, Executive Officers and Corporate Governance
All information in response to this Item is incorporated by reference to the “Directors and Executive Officers” and “Section 16(a) Beneficial Ownership Compliance” sections of OneSpan’s Proxy Statement for the 2019 Annual Meeting of Stockholders.
Item 11 -
Executive Compensation
The information in response to this Item is incorporated by reference to the “Executive Compensation” section of OneSpan’s Proxy Statement for the 2019 Annual Meeting of Stockholders.
Item 12 -
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information in response to this Item is incorporated by reference to the “Security Ownership of Certain Beneficial Owners, Directors and Management” section of OneSpan’s Proxy Statement for the 2019 Annual Meeting of Stockholders.
Item 13 -
Certain Relationships and Related Transactions, and Director Independence
The information in response to this Item is incorporated by reference to the “Directors and Executive Officers” and “Transactions with Related Persons” sections of OneSpan’s Proxy Statement for the 2019 Annual Meeting of Stockholders.
Item 14 -
Principal Accounting Fees and Services
The information in response to this Item is incorporated by reference to the “Report of the Audit Committee” section of OneSpan’s Proxy Statement for the 2019 Annual Meeting of Stockholders.
PART IV
Item 15 -
Exhibits and Financial Statement Schedules
(a) The following documents are filed as part of this Form 10‑K.
(1) The following consolidated financial statements and notes thereto, and the related independent auditors’ report, are included on pages F‑1 through F‑39 of this Form 10‑K:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2018 and 2017
Consolidated Statements of Operations for the Years Ended December 31, 2018, 2017 and 2016
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2018, 2017 and 2016
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2018, 2017 and 2016
Consolidated Statements of Cash Flows for the Years Ended December 31, 2018, 2017 and 2016
Notes to Consolidated Financial Statements
(2) The following consolidated financial statement schedule of the company is included on page F‑40 of this Form 10‑K:
Schedule II – Valuation and Qualifying Accounts
All other financial statement schedules are omitted because such schedules are not required or the information required has been presented in the aforementioned consolidated financial statements.
(3) The following exhibits are filed with this Form 10‑K or incorporated by reference as set forth at the end of the list of exhibits:
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Exhibit
Number
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Description
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2.1
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Agreement between VASCO Data Security International GmbH and D.B.A. ten Burg Holding B.V. and Bosco Holding B.V. dated January 10, 2011. (Incorporated by reference - Form 8-K filed January 14, 2011.)
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2.2
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Agreement for the Sale and Purchase of the Entire Issued Capital of Cronto Limited dated May 20, 2013. (Incorporated by reference – Form 8-K filed May 23, 2013.)
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2.3
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Arrangement Agreement, dated October 6, 2015, among VASCO Data Security International, Inc., 685102 N.B. Inc., Silanis Technology Inc., Silanis International Limited, Silanis Canada Inc., and Silanis Agent Inc. (incorporated by reference – Form 8‑K filed October 13, 2015.)
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2.4
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Stock Purchase Agreement, dated May 30, 2018 between VASCO Digital Automation Limited and shareholders of Dealflo Limited (incorporated by reference – Form 8-K filed June 1, 2018.)
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3.1
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Certificate of Incorporation of Registrant, as amended. (incorporated by reference – Form 8-K filed June 1, 2018.)
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3.2
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Bylaws of Registrant, as amended and restated January 3, 2019. (Incorporated by reference - Form 8‑K filed on January 7, 2019.)
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4.1
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Specimen of Registrant’s Common Stock Certificate. (Incorporated by reference to the Registrant’s Registration Statement on Form S‑4, as amended (Registration No. 333‑35563), originally filed on September 12, 1997.)
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4.2*
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Form of Award Agreement for Restricted Shares under the VASCO Data Security International, Inc. 1997 Stock Compensation Plan, as Amended and Restated (time-based vesting) with respect to awards granted on or after January 8, 2009. (Incorporated by reference - Form 8K filed January 14, 2009.)
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4.3*
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Form of Award Agreement for Restricted Shares under the VASCO Data Security International, Inc. 1997 Stock Compensation Plan as Amended and Restated (performance-based vesting) with respect to awards granted on or after January 8, 2009. (Incorporated by reference - Form 8‑K filed January 14, 2009.)
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4.4*
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Form of Award Agreement for Deferred Stock under the VASCO Data Security International, Inc. 2009 Equity Incentive Plan. (Incorporated by reference - Form 10‑K filed March 16, 2010.)
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4.5*
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Form of Award Agreement for Restricted Shares under the VASCO Data Security International, Inc. 2009 Equity Incentive Plan. (Incorporated by reference - Form 10‑K filed March 16, 2010.)
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4.6*
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Form of Award Agreement for Performance Shares under VASCO Data Security International, Inc. 2009 Equity Incentive Plan with respect to awards granted in 2015. (Incorporated by reference - Form 10‑K filed March 13, 2015.)
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Exhibit
Number
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Description
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4.7*
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Award Agreement for Restricted Shares under VASCO Data Security International, Inc. 2009 Equity Incentive Plan made as of October 5, 2015 between VASCO Data Security International, Inc. and Mark Stephen Hoyt. (Incorporated by reference - Form 8‑K filed October 5, 2015.)
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4.8*
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Form of Award Agreement for Performance Shares under VASCO Data Security International, Inc. 2009 Equity Incentive Plan with respect to awards granted in 2016. (Incorporated by reference - Form 10‑K filed February 29, 2016.)
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4.9*
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Fiscal Year 2016 Form of Award Agreement for Deferred Stock under the VASCO Data Security International, Inc. 2009 Equity Incentive Plan. (Incorporated by reference - Form 10‑K filed February 29, 2016.)
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4.10*
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Form of Award Agreement for Restricted Shares under the VASCO Data Security International, Inc. 2009 Equity Incentive Plan with respect to awards granted January 5, 2017. (Incorporated by reference – Form 10-K filed March 10, 2017.)
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4.11*
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Form of Award Agreement for Performance Shares under VASCO Data Security International, Inc. 2009 Equity Incentive Plan with respect to awards granted January 5, 2017. (Incorporated by reference – Form 10-K filed March 10, 2017.)
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4.12*
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Fiscal Year 2017 Form of Award Agreement for Deferred Stock under the VASCO Data Security International, Inc. 2009 Equity Incentive Plan. (Incorporated by reference – Form 10-K filed March 10, 2017.)
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4.13*
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Form of Award Agreement for Restricted Shares under the VASCO Data Security International, Inc. 2009 Equity Incentive Plan with respect to awards granted January 4, 2018. (Incorporated by reference – Form 10-K filed March 8, 2018.)
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4.14*
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Form of Award Agreement for Performance Shares under VASCO Data Security International, Inc. 2009 Equity Incentive Plan with respect to awards granted January 4, 2018. (Incorporated by reference – Form 10-K filed March 8, 2018.)
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4.15*
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Fiscal Year 2018 Form of Award Agreement for Deferred Stock under the VASCO Data Security International, Inc. 2009 Equity Incentive Plan. (Incorporated by reference – Form 10-K filed March 8, 2018.)
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10.1*
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Share Sale and Purchase Agreement by and among VASCO Data Security International, Inc., A.O.S. Holding B.V., Filipan Beheer B.V., Mr. Mladen Filipan and Pijnenburg Beheer N.V., dated February 4, 2005 (Incorporated by reference - Form 8‑K filed February 8, 2005.)
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10.2*
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VASCO Data Security International, Inc. 2009 Equity Incentive Plan, effective December 19, 2008. (Incorporated by reference to the Registrant’s Definitive Proxy Statement pursuant to Schedule 14A, filed with the SEC on April 30, 2009.)
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10.3*
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VASCO Data Security International, Inc. Executive Incentive Compensation Plan, effective December 19, 2008. (Incorporated by reference to the Registrant’s Definitive Proxy Statement pursuant to Schedule 14A, filed with the SEC on April 30, 2009.)
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10.4*
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Amended and Restated Employment Agreement effective as of January 1, 2011 between VASCO Data Security International, Inc. and T. Kendall Hunt. (Incorporated by reference - Form 8‑K filed December 21, 2010.)
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10.5*
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Letter Agreement dated February 15, 2011, by and between VASCO Data Security International, Inc. and T. Kendall Hunt. (Incorporated by reference - Form 8‑K filed February 22, 2011.)
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Exhibit
Number
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Description
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10.6*
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First Amendment dated April 23, 2014, to Amended and Restated Employment Agreement effective January 1, 2011 between VASCO Data Security International, Inc. and T. Kendall Hunt. (Incorporated by reference - Form 8‑K filed April 28, 2014.)
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10.7*
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Second Amendment dated November 24, 2014, to Amended and Restated Employment Agreement effective January 1, 2011 between VASCO Data Security International, Inc. and T. Kendall Hunt. (Incorporated by reference - Form 8‑K filed November 25, 2014.)
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10.8*
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Third Amendment dated November 20, 2015, to Amended and Restated Employment Agreement effective January 1, 2011 between VASCO Data Security International, Inc. and T. Kendall Hunt. (Incorporated by reference - Form 8‑K filed November 20, 2015.)
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10.9*
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Fourth Amendment dated August 2, 2016, to Amended and Restated Employment Agreement effective January 1, 2011 between VASCO Data Security International, Inc. and T. Kendall Hunt. (Incorporated by reference - Form 10‑Q filed August 4, 2016.)
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10.10*
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Fifth Amendment to Amended and Restated Employment Agreement, effective as of July 28, 2017, by and between VASCO Data Security International, Inc., a Delaware corporation (the “Company”), and T. Kendall Hunt (“Employee”) further amending that certain Amended and Restated Employment Agreement, effective as of January 1, 2011, as amended by the First Amendment to Amended and Restated Employment Agreement, dated as of April 23, 2014, the Second Amendment to Amended and Restated Employment Agreement, dated November 24, 2014, the Third Amendment to Amended and Restated Employment Agreement, dated November 20, 2015, and the Fourth Amendment to Amended and Restated Employment Agreement, dated September 24, 2016. (Incorporated by reference – Form 8‑K filed July 28, 2017)
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10.11*
|
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Employment Agreement, dated August 2, 2016, by and between VASCO Data Security International GmbH and T. Kendall Hunt. (Incorporated by reference – Form 10‑Q filed August 4, 2016)
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10.12*
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Employment Agreement, effective October 5, 2015, by and between VASCO Data Security International, Inc. and Mark Stephen Hoyt. (Incorporated by reference – Form 8‑K filed October 5, 2015.)
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10.13*
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Employment Agreement, dated December 1, 2015, by and between VASCO Data Security International, Inc. and Scott Clements, and Amendment No. 1 to Employment Agreement effective as of November 15, 2016. (Incorporated by reference – Form 8‑K filed November 15, 2016)
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10.14*
|
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Amendment No. 2 to Employment Agreement effective as of July 28, 2017, by and between VASCO Data Security International, Inc. (the “Company”), and Scott Clements further amending Employment Agreement entered into December 1, 2015 and first amended on November 15, 2016. (Incorporated by reference – Form 8‑K filed July 28, 2017)
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14.3
|
|
Amended Corporate Governance Guidelines of the Board of Directors of One Span Inc. and Subsidiaries.
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14.4
|
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Amended and restated By-laws of OneSpan Inc. and Subsidiaries. (Incorporated by reference – Form 8-K filed January 7, 2019.)
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21
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Subsidiaries of Registrant.
|
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23
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|
Consent of KPMG LLP.
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31.1
|
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Rule 13a‑14(a)/15d‑14(a) Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated March 15, 2019.
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|
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31.2
|
|
Rule 13a‑14(a)/15d‑14(a) Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated March 15, 2019.
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|
|
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|
*
Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10‑K.
OneSpan Inc. will furnish any of the above exhibits to stockholders upon written request addressed to the Secretary at the address given on the cover page of this Form 10‑K. The charge for furnishing copies of the exhibits is $0.25 per page, plus postage.
OneSpan Inc.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
All other financial statement schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
OneSpan Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of OneSpan Inc. and subsidiaries (the Company), formerly known as VASCO Data Security International, Inc., as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three‑year period ended December 31, 2018, and the related notes and financial statement schedule II – Valuation and Qualifying Accounts (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in
Internal Control – Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 15, 2019 expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting.
Adoption of New Accounting Pronouncement
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for revenue and certain costs effective January 1, 2018, due to the adoption of Accounting Standards Codification Topic 606,
Revenue from Contracts with Customers.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 1996.
Chicago, Illinois
March 15, 2019
OneSpan Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
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2018
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2017
|
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ASSETS
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Current assets
|
|
|
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|
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|
Cash and equivalents
|
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$
|
76,708
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$
|
78,661
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|
Short term investments
|
|
|
22,789
|
|
|
79,733
|
|
Accounts receivable, net of allowances of $1,152 in 2018 and $520 in 2017
|
|
|
59,631
|
|
|
48,126
|
|
Inventories, net
|
|
|
14,428
|
|
|
12,040
|
|
Prepaid expenses
|
|
|
4,733
|
|
|
3,876
|
|
Contract assets
|
|
|
7,962
|
|
|
—
|
|
Other current assets
|
|
|
5,705
|
|
|
5,501
|
|
Total current assets
|
|
|
191,956
|
|
|
227,937
|
|
Property and equipment:
|
|
|
|
|
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|
|
Furniture and fixtures
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|
|
7,613
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|
|
5,655
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|
Office equipment
|
|
|
11,059
|
|
|
13,084
|
|
Total Property and equipment:
|
|
|
18,672
|
|
|
18,739
|
|
Accumulated depreciation
|
|
|
(12,422)
|
|
|
(13,963)
|
|
Property and equipment, net
|
|
|
6,250
|
|
|
4,776
|
|
Goodwill
|
|
|
91,841
|
|
|
56,332
|
|
Intangible assets, net of accumulated amortization
|
|
|
45,462
|
|
|
37,888
|
|
Deferred income taxes
|
|
|
5,601
|
|
|
5,460
|
|
Contract assets - non-current
|
|
|
3,316
|
|
|
—
|
|
Other assets
|
|
|
8,400
|
|
|
5,229
|
|
Total assets
|
|
$
|
352,826
|
|
$
|
337,622
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
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|
|
Current liabilities
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
7,202
|
|
$
|
8,144
|
|
Deferred revenue
|
|
|
33,633
|
|
|
33,295
|
|
Accrued wages and payroll taxes
|
|
|
13,932
|
|
|
11,643
|
|
Short-term income taxes payable
|
|
|
6,905
|
|
|
3,673
|
|
Other accrued expenses
|
|
|
9,323
|
|
|
7,746
|
|
Deferred compensation
|
|
|
1,362
|
|
|
1,652
|
|
Total current liabilities
|
|
|
72,357
|
|
|
66,153
|
|
Long-term deferred revenue
|
|
|
10,672
|
|
|
7,019
|
|
Other long-term liabilities
|
|
|
7,075
|
|
|
5,919
|
|
Long-term income taxes payable
|
|
|
7,620
|
|
|
12,848
|
|
Deferred income taxes
|
|
|
2,661
|
|
|
7,753
|
|
Total liabilities
|
|
|
100,385
|
|
|
99,692
|
|
Stockholders' equity
|
|
|
|
|
|
|
|
Preferred stock: 500 shares authorized, none issued and outstanding at December 31, 2018 and 2017
|
|
|
—
|
|
|
—
|
|
Common stock: $.001 par value per share, 75,000 shares authorized; 40,225 and 40,086 issued and outstanding at December 31, 2018 and 2017, respectively
|
|
|
40
|
|
|
40
|
|
Additional paid-in capital
|
|
|
93,310
|
|
|
90,307
|
|
Accumulated income
|
|
|
172,378
|
|
|
156,151
|
|
Accumulated other comprehensive loss
|
|
|
(13,287)
|
|
|
(8,568)
|
|
Total stockholders' equity
|
|
|
252,441
|
|
|
237,930
|
|
Total liabilities and stockholders' equity
|
|
$
|
352,826
|
|
$
|
337,622
|
See accompanying notes to consolidated financial statements.
OneSpan Inc.
CONSOLIDATED STATEMENTS OF
OPERATIONS
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
Product and license
|
|
$
|
152,977
|
|
$
|
147,257
|
|
$
|
156,057
|
|
Services and other
|
|
|
59,303
|
|
|
46,034
|
|
|
36,247
|
|
Total revenue
|
|
|
212,280
|
|
|
193,291
|
|
|
192,304
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
|
|
|
|
|
|
|
|
Product and license
|
|
|
50,706
|
|
|
48,333
|
|
|
53,191
|
|
Services and other
|
|
|
14,107
|
|
|
10,444
|
|
|
8,456
|
|
Total cost of goods sold
|
|
|
64,813
|
|
|
58,777
|
|
|
61,647
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
147,467
|
|
|
134,514
|
|
|
130,657
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
63,805
|
|
|
58,994
|
|
|
57,347
|
|
Research and development
|
|
|
32,197
|
|
|
23,119
|
|
|
23,214
|
|
General and administrative
|
|
|
41,589
|
|
|
37,400
|
|
|
31,648
|
|
Amortization / impairment of intangible assets
|
|
|
9,852
|
|
|
8,809
|
|
|
8,849
|
|
Total operating costs
|
|
|
147,443
|
|
|
128,322
|
|
|
121,058
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
24
|
|
|
6,192
|
|
|
9,599
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, net
|
|
|
1,265
|
|
|
1,431
|
|
|
785
|
|
Other income, net
|
|
|
2,264
|
|
|
758
|
|
|
993
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
3,553
|
|
|
8,381
|
|
|
11,377
|
|
Provision (benefit) for income taxes
|
|
|
(293)
|
|
|
30,780
|
|
|
863
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
3,846
|
|
$
|
(22,399)
|
|
$
|
10,514
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.10
|
|
$
|
(0.56)
|
|
$
|
0.27
|
|
Diluted
|
|
$
|
0.10
|
|
$
|
(0.56)
|
|
$
|
0.27
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
39,932
|
|
|
39,802
|
|
|
39,719
|
|
Diluted
|
|
|
40,046
|
|
|
39,802
|
|
|
39,782
|
See accompanying notes to consolidated financial statements.
OneSpan Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(LOSS)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Net income (loss)
|
|
$
|
3,846
|
|
$
|
(22,399)
|
|
$
|
10,514
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
Cumulative translation adjustment, net
|
|
|
(5,516)
|
|
|
4,029
|
|
|
(2,488)
|
|
Pension adjustment, net of tax of $95 in 2018, $53 in 2017, and $509 in 2016
|
|
|
797
|
|
|
313
|
|
|
(1,736)
|
|
Comprehensive income (loss)
|
|
$
|
(873)
|
|
$
|
(18,057)
|
|
$
|
6,290
|
See accompanying notes to consolidated financial statements.
OneSpan Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
Other
|
|
Total
|
|
|
|
Common Stock
|
|
Paid-In
|
|
Accumulated
|
|
Comprehensive
|
|
Stockholders'
|
|
Description
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Income
|
|
Income (Loss)
|
|
Equity
|
|
Balance at January 1, 2016
|
|
40,108
|
|
|
40
|
|
|
85,766
|
|
|
168,036
|
|
|
(8,686)
|
|
|
245,156
|
|
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10,514
|
|
|
—
|
|
|
10,514
|
|
Foreign currency translation adjustment , net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,488)
|
|
|
(2,488)
|
|
Restricted stock awards
|
|
(11)
|
|
|
—
|
|
|
2,766
|
|
|
—
|
|
|
—
|
|
|
2,766
|
|
Tax payments for stock issuances
|
|
—
|
|
|
—
|
|
|
(1,051)
|
|
|
—
|
|
|
—
|
|
|
(1,051)
|
|
Pension adjustment, net of tax of $509
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,736)
|
|
|
(1,736)
|
|
Balance at December 31, 2016
|
|
40,097
|
|
|
40
|
|
|
87,481
|
|
|
178,550
|
|
|
(12,910)
|
|
|
253,161
|
|
Net loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(22,399)
|
|
|
—
|
|
|
(22,399)
|
|
Foreign currency translation adjustment, net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,029
|
|
|
4,029
|
|
Restricted stock awards
|
|
(11)
|
|
|
—
|
|
|
3,466
|
|
|
—
|
|
|
—
|
|
|
3,466
|
|
Tax payments for stock issuances
|
|
—
|
|
|
—
|
|
|
(640)
|
|
|
—
|
|
|
—
|
|
|
(640)
|
|
Pension adjustment, net of tax of $53
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
313
|
|
|
313
|
|
Balance at December 31, 2017
|
|
40,086
|
|
|
40
|
|
|
90,307
|
|
|
156,151
|
|
|
(8,568)
|
|
|
237,930
|
|
Cumulative impact of change in accounting principles, net of tax
|
|
—
|
|
|
—
|
|
|
—
|
|
|
12,381
|
|
|
—
|
|
|
12,381
|
|
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,846
|
|
|
—
|
|
|
3,846
|
|
Foreign currency translation adjustment
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,516)
|
|
|
(5,516)
|
|
Restricted stock awards
|
|
139
|
|
|
—
|
|
|
3,973
|
|
|
—
|
|
|
—
|
|
|
3,973
|
|
Tax payments for stock issuances
|
|
—
|
|
|
—
|
|
|
(970)
|
|
|
—
|
|
|
—
|
|
|
(970)
|
|
Pension adjustment, net of tax of $95
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
797
|
|
|
797
|
|
Balance at December 31, 2018
|
|
40,225
|
|
$
|
40
|
|
$
|
93,310
|
|
$
|
172,378
|
|
$
|
(13,287)
|
|
$
|
252,441
|
See accompanying notes to consolidated financial statements.
OneSpan Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from operations
|
|
$
|
3,846
|
|
$
|
(22,399)
|
|
$
|
10,514
|
|
Adjustments to reconcile net income (loss) from operations to net cash provided by (used in) operations:
|
|
|
|
|
|
|
|
|
|
|
Depreciation, amortization, and impairment of intangible assets
|
|
|
12,138
|
|
|
10,601
|
|
|
10,777
|
|
Loss (gain) on disposal of assets
|
|
|
(49)
|
|
|
185
|
|
|
14
|
|
Deferred tax expense (benefit)
|
|
|
(7,431)
|
|
|
13,053
|
|
|
(4,936)
|
|
Stock-based compensation
|
|
|
3,973
|
|
|
3,466
|
|
|
2,766
|
|
Accounts receivable, net
|
|
|
(11,960)
|
|
|
(8,428)
|
|
|
(8,106)
|
|
Inventories, net
|
|
|
(2,388)
|
|
|
5,380
|
|
|
3,198
|
|
Contract assets
|
|
|
(3,110)
|
|
|
—
|
|
|
—
|
|
Accounts payable
|
|
|
(1,475)
|
|
|
(1,013)
|
|
|
163
|
|
Income taxes payable
|
|
|
(2,541)
|
|
|
11,926
|
|
|
(582)
|
|
Accrued expenses
|
|
|
2,211
|
|
|
2,514
|
|
|
4
|
|
Deferred compensation
|
|
|
(291)
|
|
|
(77)
|
|
|
226
|
|
Deferred revenue
|
|
|
9,538
|
|
|
3,704
|
|
|
14,396
|
|
Other assets and liabilities
|
|
|
(1,235)
|
|
|
(1,285)
|
|
|
(19)
|
|
Net cash provided by operating activities
|
|
|
1,226
|
|
|
17,627
|
|
|
28,415
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Purchase of short term investments
|
|
|
(22,820)
|
|
|
(178,658)
|
|
|
(184,690)
|
|
Maturities of short term investments
|
|
|
80,000
|
|
|
195,000
|
|
|
134,775
|
|
Purchase of Dealflo, net of cash acquired
|
|
|
(53,065)
|
|
|
—
|
|
|
—
|
|
Additions to property and equipment
|
|
|
(3,685)
|
|
|
(3,088)
|
|
|
(2,043)
|
|
Other
|
|
|
(236)
|
|
|
(456)
|
|
|
(4,538)
|
|
Net cash provided by (used in) investing activities
|
|
|
194
|
|
|
12,798
|
|
|
(56,496)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Tax payments for restricted stock issuances
|
|
|
(970)
|
|
|
(640)
|
|
|
(1,051)
|
|
Net cash used in financing activities
|
|
|
(970)
|
|
|
(640)
|
|
|
(1,051)
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
(1,556)
|
|
|
(469)
|
|
|
(45)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
(1,106)
|
|
|
29,316
|
|
|
(29,177)
|
|
Cash, cash equivalents, and restricted cash, beginning of period
|
|
|
78,661
|
|
|
49,345
|
|
|
78,522
|
|
Cash, cash equivalents, and restricted cash, end of period
|
|
$
|
77,555
|
|
$
|
78,661
|
|
$
|
49,345
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow disclosures:
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
10,884
|
|
$
|
6,427
|
|
$
|
5,982
|
See accompanying notes to consolidated financial statements.
OneSpan Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
Unless otherwise noted, references in this Annual Report on Form 10‑K to “OneSpan”, “Company”, “we”, “our” and “us” refer to OneSpan Inc. and its subsidiaries.
Note 1 – Summary of Significant Accounting Policies
Description of the Company
Effective May 30, 2018, VASCO Data Security International, Inc. changed its name to OneSpan Inc. The Company believes that the name change reflects a shift in its strategy and solution offering.
OneSpan Inc. and its wholly owned subsidiaries design, develop, market and support hardware and software security systems that manage and secure access to information assets. OneSpan has operations in Austria, Australia, Belgium, Brazil, Canada, China, France, Japan, The Netherlands, Singapore, Switzerland, the United Arab Emirates, the United Kingdom (U.K)., and the United States (U.S.).
In accordance with ASC 280, Segment Reporting, our operations are reported as a single operating segment.
Principles of Consolidation
The consolidated financial statements include the accounts of OneSpan Inc. and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.
Reclassifications
Certain amounts from prior years have been reclassified to conform to current year presentation.
Estimates and Assumptions
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Foreign Currency Translation and Transactions
The financial position and results of operations of the majority of the Company’s foreign subsidiaries are measured using the local currency as the functional currency. Accordingly, assets and liabilities are translated into U.S. Dollars using current exchange rates as of the balance sheet date. Revenues and expenses are translated at average exchange rates prevailing during the year. Translation adjustments arising from differences in exchange rates are charged or credited to other comprehensive income (loss). Gains or (losses) resulting from foreign currency transactions were $0.2 million, $
0.5 million
, and $
0.1 million
in 2018, 2017, and 2016, respectively, and are included in other income, net in the consolidated statements of operations.
The financial position and results of our operations in Singapore, Switzerland, and certain operations in Canada are measured in U.S. Dollars. For these subsidiaries, gains and losses that result from foreign currency transactions are included in the consolidated statements of operations in other income, net.
Table of Contents
ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
Revenue Recognition
Under ASC 605 – For the Years ended December 31, 2017 and 2016
Prior to January 1, 2018 we recognized revenue in accordance
with ASC 985-605,
Software – Revenue Recognition
, ASC 985-605-25,
Revenue Recognition – Multiple Element Arrangements
and Staff Accounting Bulletin 104.
Product and License Revenue includes hardware products and software licenses. Services and Other includes software as a service (“SaaS”), maintenance and support, and professional services.
Revenue is recognized when there is persuasive evidence that an arrangement exists, delivery has occurred, the fee is fixed or determinable and collection of the revenue is probable.
In multiple-element arrangements, some of our products are accounted for under the software provisions of ASC 985-605 and others under the provisions that relate to the sale of non-software products.
In our typical multiple-element arrangement, the primary deliverables include:
1.
a client component (i.e., an item that is used by the person being authenticated in the form of either a new standalone hardware device or software that is downloaded onto a device the customer already owns);
2.
host system software that is installed on the customer’s systems (i.e., software on the host system that verifies the identity of the person being authenticated) or licenses for additional users on the host system software if the host system software had been installed previously; and
3.
post contract support (PCS) in the form of maintenance on the host system software or support.
Our multiple-element arrangements may also include other items that are usually delivered prior to the recognition of any revenue are incidental to the overall transaction such as initialization of the hardware device, customization of the hardware device itself or the packaging in which it is delivered, deployment services where we deliver the device to our customer’s end-use customer or employee and, in some limited cases, professional services to assist with the initial implementation of a new customer.
In multiple-element arrangements that include a hardware client device, we allocate the selling price among all elements, delivered and undelivered, based on our internal price lists and the percentage of the selling price of that element, per the price list, to the total of the estimated selling price of all of the elements per the price list. Our internal price lists for both delivered and undelivered elements were determined to be reasonable estimates of the selling price of each element based on a comparison of actual sales made to the price list. In multiple-element arrangements that include a software client device, we continue to account for each element under the current standards of ASC 985-605 related to software. When software client device and host software are delivered elements, we use the Residual Method for determining the amount of revenue to recognize for token and software licenses if we have vendor-specific objective evidence (“VSOE”) for all of the undelivered elements. Any discount provided to the customer is applied fully to the delivered elements in such an arrangement. VSOE for undelivered elements is established using the “bell curve method.” Under this method, we conclude VSOE exists when a substantial majority of PCS renewals are within a narrow range of pricing. The estimated selling price of PCS items is based on an established percentage of the user license fee attributable to the specific software. In sales arrangements where VSOE of fair value has not been established, revenue for all elements is deferred and amortized over the life of the arrangement.
For transactions other than multiple-element arrangements, we recognize revenue as follows:
1.
Product and License Revenue
: Revenue from the sale of computer security hardware or the license of software is recorded upon shipment or, if an acceptance period is allowed, at the latter of shipment or customer
Table of Contents
ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
acceptance. No significant obligations or contingencies exist with regard to delivery, customer acceptance or rights of return at the time revenue is recognized.
2.
SaaS
: We generate SaaS revenues from our cloud services offerings. SaaS revenues include fees from customers for access to the OneSpan Sign (formerly eSignLive) suite of solutions. Our standard customer arrangements generally do not provide the customer with the right to take possession of the software supporting the cloud-based application service at any time. As such, these arrangements are considered service contracts and revenue is recognized ratably over the service period of the contract.
3.
Maintenance and Support Agreements
: Maintenance and support agreements generally call for us to provide software updates and technical support, respectively, to customers. Revenue on maintenance and technical support is deferred and recognized ratably over the term of the applicable maintenance and support agreement.
4.
Professional Services
: We provide professional services to our customers. Revenue from such services is recognized during the period in which the services are performed.
We recognize revenue from sales to distributors and resellers on the same basis as sales made directly to customers. We recognize revenue when there is persuasive evidence that an arrangement exists, delivery has occurred, the fee is fixed or determinable and collection of the revenue is probable.
For large-volume transactions, we may negotiate a specific price that is based on the number of users of the software license or quantities of hardware supplied. The per unit prices for large-volume transactions are generally lower than transactions for smaller quantities and the price differences are commonly referred to as volume-purchase discounts.
All revenue is reported on a net basis, excluding any sales taxes or value added taxes.
Under ASC 606 – For the Year ended December 31, 2018
On January 1, 2018, we adopted Accounting Standards Update No. 2014-09
“Revenue from Contracts with Customers”
(FASB Accounting Standards Codification (ASC) Topic 606, or “Topic 606”) using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under FASB ASC Topic 605 “
Revenue Recognition
” and FASB ASC Topic 985-605 “
Software-Revenue Recognition
” (“Topic 605”). We recorded a net increase to opening Accumulated Income of $11.9 million, net of tax, as of January 1, 2018 due to the cumulative impact of adopting Topic 606, with the impact primarily related to the accounting impacts of our customer contracts that include a term license to our software, as well as the impact of accounting for costs incurred to obtain our contracts. The net impact to revenue as a result of applying Topic 606 was an increase of $3.4 million for the year ended December 31, 2018. See Note 4 - Revenue for further details. We determine revenue recognition through the following steps:
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Identification of the contract, or contracts, with a customer;
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Identification of the performance obligations in the contract;
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Determination of the transaction price;
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Allocation of the transaction price to the performance obligations in the contract; and
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Recognition of revenue when, or as, we satisfy a performance obligation.
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Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those products or services, which excludes any sales incentives and amounts collected on behalf of third parties. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue. Shipping and handling costs associated with outbound freight
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ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of goods sold.
Nature of Goods and Services
We derive our revenues primarily from Product and License Revenue, which includes hardware products and software licenses, and Services and Other, which is inclusive of software-as-a-service (which we refer to as “subscription”), maintenance and support, and professional services.
Product Revenue:
Revenue from the sale of security hardware is recorded upon shipment, which is the point at which control of the goods are transferred and the completion of the performance obligations, unless there are specific terms that would suggest control is transferred at a later date (e.g. delivery). No significant obligations or contingencies typically exist with regard to delivery, customer acceptance or rights of return at the time revenue is recognized. Customer payments normally correspond with delivery.
License Revenue:
Revenue from the sale of software licensing is recorded upon the latter of when the customer receives the ability to access the software or when they are legally allowed to use the software. No significant obligations or contingencies exist with regard to delivery, customer acceptance or rights of return at the time revenue is recognized. Contracts with customers for distinct licenses of intellectual property include perpetual licenses, which grant the customer unlimited access to the software, and term licenses which limit the customer’s access to the software to a specific time period. The typical term license length is 3 years. Customer payments normally correspond with delivery for perpetual licenses. For term licenses, payments are made either on installment or upon initial delivery. In limited circumstances, we integrate third party software solutions into our software products. We have determined that, consistent with our conclusion under prior revenue recognition rules, generally we act as the principal with respect to the satisfaction of the related performance obligation and record the corresponding revenue on a gross basis from these transactions. For transactions in which we do not act as the principal, we would recognize revenue on a net basis. The fees paid to the third parties are recognized as a component of cost of goods sold when the revenue is recognized.
Subscription Revenue:
We generate subscription revenues from our cloud services offerings. Subscription revenues mostly include fees from customers for access to the OneSpan Sign and Dealflo solutions. Our standard customer arrangements do not provide the customer with the right to take possession of the software supporting the cloud-based application service at any time. As such, these arrangements are considered service contracts and revenue is recognized ratably over the service period of the contract or based on customer usage. Customer payments are normally in advance for an annual subscription period.
Maintenance, Support and Other:
Maintenance and support agreements generally call for us to provide software updates and technical support, respectively, to customers. The annual fee for maintenance and technical support is recognized ratably over the term of the maintenance and support agreement. Customer payments are normally in advance for annual service.
Professional Services:
Professional services revenues are primarily comprised of implementing, automating and extending business processes, technology infrastructure, and software applications. Professional services revenues are recognized over time as services are rendered. Most projects are performed on a time and materials basis, while a portion of revenues is derived from projects performed on a fixed fee. For time and material contracts, revenues are generally recognized and invoiced by multiplying the number of hours expended in the performance of the contract by the hourly rates. For fixed fee contracts, revenues are generally recognized using an input method based on the ratio of hours expended to total estimated hours.
Significant Judgments
We enter into contracts to deliver a combination of hardware devices, software licenses, subscriptions, maintenance and support and, in some situations, professional services. The Company evaluates the nature of the goods or services promised in these arrangements to identify the distinct performance obligations. Determining whether
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ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. When a hardware client device and licenses to host software are sold in a contract, they are treated as a single performance obligation because the software license is deemed to be a component of the hardware that is integral to the functionality of the hardware that is used by our customers for identity authentication. When a software client device is sold in a contract host software, the licenses are considered a single performance obligation to deliver the authentication solution to the customer. In either of these types of arrangements, maintenance and support and professional services are typically distinct separate performance obligations from the hardware or software solutions. Our contracts to deliver subscription services typically do not include multiple performance obligations; however, in certain limited cases, customers may purchase professional services that are distinct performance obligations.
For contracts that contain multiple performance obligations, the transaction price is allocated to the separate performance obligations based on their estimated relative stand-alone selling price (“SSP”). Judgment is required to determine the stand-alone selling price of each distinct performance obligation. We determine SSP for maintenance and support and professional services based on observable inputs; specifically, the range of prices charged to customers to renew annual maintenance and support contracts and the range of hourly rates we charge our customers in standalone professional services contracts. In instances where SSP is not directly observable, and when we sell at a highly variable price range, such as for transactions involving software licenses or subscriptions, we determine the SSP for those performance obligations using the residual method.
Cash and Cash Equivalents
Cash and cash equivalents are stated at cost plus accrued interest, which approximates fair value. Cash equivalents are high-quality short term money market instruments and commercial paper with maturities at acquisition of three months or less. Cash and cash equivalents are held by a number of U.S. and non-U.S. commercial banks and money market investment funds. During the year ended December 31, 2018, we entered into a new lease agreement that required a letter of credit in the amount of $0.8 million to secure the obligation. The restricted cash related to this letter of credit is recorded in other non-current assets on the Consolidated Balance Sheet. There was no restricted cash at December 31, 2017.
Short Term Investments
Short term investments consist of U.S. treasury bills and notes, corporate notes, and high quality commercial paper with maturities at acquisition of more than three months and less than twelve months. Fair value is determined using Level 2 inputs as defined by ASC 820,
Fair Value Measurements
.
The hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
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Level 1 – Quoted prices in active markets for identical assets and liabilities.
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Level 2 – Quoted prices in active markets for similar assets and liabilities, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial investment.
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Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
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ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
Accounts Receivable and Allowance for Doubtful Accounts
The credit worthiness of customers (including distributors and resellers) is reviewed prior to shipment. A reasonable assurance of collection is a requirement for revenue recognition. Verification of credit and/or the establishment of credit limits are part of the customer contract administration process. Credit limit adjustments for existing customers may result from the periodic review of outstanding accounts receivable. The Company records trade accounts receivable at invoice values, which are generally equal to fair value.
We maintain allowances for estimated losses resulting from the inability of our customers to make payments for goods and services. We analyze accounts receivable balances, customer credit-worthiness, current economic trends and changes in our customer payment timing when evaluating the adequacy of the allowance for doubtful accounts. The allowance is based on a specific review of all significant past-due accounts. If the financial condition of our customers deteriorates, resulting in an impairment of their ability to make payments, additional allowances may be required.
Inventories
Inventories, consisting principally of hardware and component parts, are stated at the lower of cost or net realizable value. Cost is determined using the first-in-first-out (FIFO) method. We write down inventory when it appears that the carrying cost of the inventory may not be recovered through subsequent sale of the inventory. We analyze the quantity of inventory on hand, the quantity sold in the past year, the anticipated sales volume in the form of sales to new customers as well as sales to previous customers, the expected sales price and the cost of making the sale when evaluating the valuation of our inventory. If the sales volume or sales price of a specific model declines significantly, additional write downs may be required.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets ranging from three to ten years. Leasehold improvements are depreciated over the lesser of the remaining lease term or 10 years. Additions and improvements are capitalized, while expenditures for maintenance and repairs are charged to operations as incurred. Gains or losses resulting from sales or retirements are recorded as incurred, at which time related costs and accumulated depreciation are removed from the accounts. Depreciation expense for the years ended December 31, 2018, 2017, and 2016 of $
2.3 million
, $1
.8 million,
and $1.9 million, respectively, is included in operating expenses.
Long Term Investments
Included in Other Assets is a minority equity investment in a company we believe may be beneficial in executing our strategy. At December 31, 2018 and 2017, investments were $4.1 million and $4.4 million, respectively. In accordance with ASC 325,
Investments – Other
, the investments are recorded at fair value using the alternative measurement method allowed for in ASU No. 2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities
(ASU 2016-01), and are evaluated for impairment annually, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. At December 31, 2017, long term investments included an equity investment in Dealflo Limited of $0.3 million. See Note 3 – Business Acquisitions for additional detail.
Cost of Goods Sold
Included in product and license cost of goods sold are direct product costs. Cost of goods sold related to service revenues are primarily costs related to subscription solutions, including personnel and equipment costs, and personnel costs of employees providing professional services and maintenance support.
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ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
Research and Development Costs
Costs for research and development, principally the design and development of hardware, and the design and development of software prior to the determination of technological feasibility, are expensed as incurred on a project-by-project basis.
Software Development Costs
Software development costs are accounted for in accordance with ASC 985-20,
Costs of Software to be Sold, Leased, or Marketed.
Research costs and software development costs, prior to the establishment of technological feasibility, determined based upon the creation of a working model, are expensed as incurred. Our software capitalization policy defines technological feasibility as a functioning beta test prototype with confirmed manufacturability (a working model), within a reasonably predictable range of costs. Additional criteria include receptive customers, or potential customers, as evidenced by interest expressed in a beta test prototype, at some suggested selling price. Our policy is to amortize capitalized costs by the greater of (a) the ratio that current gross revenue for a product bears to the total of current and anticipated future gross revenue for that product or (b) the straight-line method over the remaining estimated economic life of the product, generally two to five years, including the period being reported on.
No
material
software development costs were capitalized during the years ended December 31, 2018, 2017, and 2016.
Other Income (Expense), Net
Other income (expense), net primarily includes exchange gains (losses) on transactions that are denominated in currencies other than our subsidiaries’ functional currencies, subsidies received from foreign governments in support of our research and development in those countries and other miscellaneous non-operational expenses. During 2018, the Company recognized a $1.2 million government subsidy from a foreign government in support of our advancement authentication technology, which is included in other income (expense), net on the statements of operations for the year ended December 31, 2018.
Income Taxes
Our provision for income taxes includes amounts payable or refundable for the current year, the effects of deferred taxes and impacts from uncertain tax positions. We recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement and tax basis of our assets and liabilities, operating loss carryforwards and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which those differences are expected to reverse.
The realization of certain deferred tax assets is dependent on generating sufficient taxable income in the appropriate jurisdiction prior to the expiration of the carryforward periods. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. When assessing the need for a valuation allowance, we consider any carryback potential, future reversals of existing taxable temporary differences (including liabilities for unrecognized tax benefits), future taxable income and tax planning strategies.
We have significant net operating loss and other deductible carryforwards in certain jurisdictions available to reduce the liability on future taxable income. A valuation allowance has been provided to offset some of these future benefits because we have not determined that their realization is more likely than not.
We recognize tax benefits in our financial statements from uncertain tax positions only if it is more likely than not that the tax position will be sustained based on the technical merits of the position. The amount we recognize is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon resolution. Future
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ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
changes related to the expected resolution of uncertain tax positions could affect tax expense in the period when the change occurs.
We monitor for changes in tax laws and reflect the impacts of tax law changes in the period of enactment. In response to the U.S. tax reform legislation enacted on December 22, 2017, the U.S. Securities and Exchange Commission (“SEC”) issued guidance that allowed us to record provisional amounts for the impacts of U.S. tax reform.
Due to the timing of the enactment and the complexity involved in applying the provisions of Tax Reform, we made reasonable estimates of the effects and recorded provisional amounts in our financial statements as of December 31, 2017. As we collected and prepared necessary data, and interpreted the additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, we made adjustments, over the course of the year, to the provisional amounts, including refinements to deferred taxes. The accounting for the tax effects of Tax Reform has been completed as of December 31, 2018.
See Note 7 - Income Taxes, for additional information on how we recorded the impacts of the U.S. tax reform
Fair Value of Financial Instruments
At December 31, 2018 and 2017, our financial instruments were cash and equivalents, short term investments, accounts receivable, accounts payable and accrued liabilities. The estimated fair value of our financial instruments has been determined by using available market information and appropriate valuation methodologies, as defined in ASC 820,
Fair Value Measurements
. The fair values of the financial instruments were not materially different from their carrying amounts at December 31, 2018 and 2017.
Accounting for Leases
All of our leases are operating leases. Rent expense on facility leases is charged evenly over the life of the lease, regardless of the timing of actual payments. We relocated one of our principal executive offices from Oakbrook Terrace, Illinois to Chicago, Illinois during 2018 and recognized $0.3 million of lease exit costs in general and administrative expense on the statement of operations for the year ended December 31, 2018.
Impairment of Long-Lived and Intangible Assets
Definite-lived intangible assets include proprietary technology, customer relationships, and other intangible assets. Intangible assets other than patents with definite lives are amortized over the useful life, generally three to seven years for proprietary technology and five to twelve years for customer relationships. Patents are amortized over the life of the patent, generally 20 years in the U.S. Intangible assets arising from business combinations, such as acquired technology, customer relationships, and other intangible assets, are originally recorded at fair value. As a result of the Company rebranding, the value of certain intangible assets were written down during the second quarter of 2018, and impairment charges of $0.5 million were recorded for the year ended December 31, 2018.
Long-lived assets, including property, plant and equipment, definite-lived intangible assets being amortized and capitalized software costs, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the long-lived asset group may not be recoverable. An impairment loss shall be recognized if the carrying amount of a long-lived asset group exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If it is determined that an impairment loss has occurred, the loss is measured as the amount by which the carrying amount of the long-lived asset group exceeds its fair value. Long-lived assets held for sale are reported at the lower of carrying value or fair value less cost to sell.
Goodwill
Goodwill represents the excess of purchase price over the fair value of net identifiable assets acquired in a business combination. We assess the impairment of goodwill and intangible assets each November 30 or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Company’s impairment
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ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
assessment begins with a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. The qualitative assessment includes comparing the overall financial performance of the reporting unit against the planned results used in the last quantitative goodwill impairment test. Additionally, the reporting unit’s fair value is assessed in light of certain events and circumstances, including macroeconomic conditions, industry and market considerations, cost factors, and other relevant entity- and reporting unit specific events. The selection and assessment of qualitative factors used to determine whether it is more likely than not that the fair value of the reporting unit is less than the carrying value may involve significant judgments and estimates. If it is determined under the qualitative assessment that it is more likely than not that the fair value of the reporting unit is less than its carrying value, then a two-step quantitative impairment test is performed. Under the first step, the estimated fair value of the reporting unit is compared with its carrying value (including goodwill). If the fair value of the reporting unit exceeds its carrying value, step two does not need to be performed. If the estimated fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the enterprise must perform step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation in acquisition accounting. The residual amount after this allocation is the implied fair value of the reporting unit goodwill. Fair value of the reporting unit under the two-step assessment is determined using a combination of both income and market-based variation approaches. The inputs and assumptions to valuation methods used to estimate the fair value of the reporting unit involves significant judgments.
We operate in one reporting unit and had no goodwill impairment recorded for the years ended December 31, 2018, 2017, and 2016.
Stock-Based Compensation
We have stock-based employee compensation plans, described in Note 8 – Long-Term Compensation Plan and Stock Compensation. ASC 718,
Stock Compensation
requires us to estimate the fair value of restricted stock granted to employees, directors and others to record compensation expense equal to the estimated fair value. Compensation expense is recorded on a straight-line basis over the vesting period for time-based awards and on a graded basis for performance awards. Forfeitures are recorded as incurred.
Retirement Benefits
We record annual expenses relating to pension defined benefit plans based on calculations which include various actuarial assumptions, including discount rates, assumed asset rates of return, compensation increases, and turnover rates. We review our actuarial assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends. The effects of gains, losses, and prior service costs and credits are amortized over the average service life. The funded status, or projected benefit obligation less plan assets, for each plan, is reflected in our consolidated financial statements using a December 31 measurement date.
Recently Issued Accounting Pronouncements
Effective January 1, 2018, we adopted ASU 2016-01
Recognition and Measurement of Financial Assets and Financial Liabilities
, which revises the classification and measurement of investments in equity securities. ASU 2016-01 requires that equity investments, except those accounted for under the equity method of accounting, be measured at fair value and changes in fair value are recognized in net income. ASU 2016-01 also provides a new measurement alternative for equity investments that do not have a readily determinable fair value (cost method investments). These investments are measured at cost, less any impairment, adjusted for observable price changes. Effective January 1, 2018, we elected to record our equity investments that do not have a readily determinable fair value using the alternative measurement method. Accordingly upon adoption, we recorded a cumulative effect adjustment to increase opening accumulated income at January 1, 2018 by $0.5 million, net of tax, as required for our equity investments with no readily determinable fair value to reflect these investments at approximate fair value.
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ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
In February 2016, the FASB issued ASU No. 2016-02,
Leases
which supersedes ASC Topic 840,
Lease
s, and creates a new topic, ASC Topic 842,
Leases
. Since that date, the FASB has issued additional ASUs clarifying certain aspects of ASU 2016-02. The guidance requires a lessee to recognize a liability to make lease payments and a right-of-use asset representing its rights to use the underlying asset for the lease term for both finance and operating leases. This guidance is effective for us on January 1, 2019. As part of adoption, we reviewed our active lease contracts as of December 31, 2018, and reviewed other contracts for potential embedded leases. We selected a solution and are establishing new processes and internal controls to address the standard.
We will adopt this guidance in the first quarter of 2019 using the optional transition method in which we recognize a cumulative effect adjustment of adopting the standard in the period of adoption without restating the prior periods shown. We plan to elect the package of practical expedients that allows us to not reassess (1) whether contracts are or contain leases, (2) lease classification; and (3) initial direct costs for existing leases. We do not plan on applying the hindsight expedients that would allow us to reassess lease terms and impairments of exiting leases. Upon adoption, we expect to record a right of use asset and a corresponding lease liability for our operating leases. The potential impact on our consolidated financial statements is largely based on the present value of future minimum lease payments, the amount of which will depend upon the population of leases in effect at the date of adoption. Future minimum lease payments totaled $22.6 million as of December 31, 2018, as disclosed in Note 12 – Commitments and Contingencies. We expect the adoption of this standard will have a material impact on our Consolidated Financial Statements.
In November 2016, the FASB issued ASU No. 2016-18,
Statement of Cash Flows: Restricted Cash (Topic 230)
. This ASU requires that a statement of cash flows explain the change during the period in the total of cash, and cash equivalents, including amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. This ASU was effective for us in the first quarter of fiscal 2018. Adoption is required on a retrospective transition basis. The Company recorded $0.8 million of restricted cash for the year ended December 31, 2018 as part of total cash, cash equivalents and restricted cash when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flow. The restricted cash is recorded in other assets on the balance sheet as of December 31, 2018. The Company did not have any restricted cash or restricted cash equivalents for the years ended December 31, 2017 and December 31, 2016.
In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (ASC 230) – Classification of Certain Cash Receipts and Cash Payments
. This guidance clarifies eight specific cash flow issues in an effort to reduce diversity in practice in how certain transactions are classified within the statement of cash flows. We adopted this ASU on January 1, 2018 on a retrospective basis; however, the impact was not material to our consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16,
Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory
. The new guidance is intended to simplify the accounting for intercompany asset transfers. The core principle requires an entity to immediately recognize the tax consequences of intercompany asset transfers. We adopted this standard on January 1, 2018 on a prospective basis. The impact was not material to our consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01,
Business Combinations – Clarifying the Definition of a Business
. This standard changes the definition of a business by requiring that at least one substantive process exist in the acquired entity. It also states that if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, then the set of transferred assets and activities is not a business. We adopted the standard on January 1, 2018 on a prospective basis. The adoption of this standard did not have a material impact on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, I
ntangibles-Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment
. This standard eliminates the requirement to calculate the implied fair value of goodwill to
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ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
measure a goodwill impairment charge (i.e. Step 2 of the current guidance), instead measuring the impairment charge as the excess of the reporting unit's carrying amount over its fair value (i.e. Step 1 of the current guidance). The guidance is effective for us beginning in the first quarter of 2020, and should be applied prospectively. Early adoption is permitted for impairment testing dates after January 1, 2017. We are currently evaluating the effect, if any, that the ASU will have on our consolidated financial statements and related disclosures.
In March 2017, the FASB issued ASU No. 2017-07,
Compensation - Retirement Benefits (ASC 715) - Improving the Presentation of Net Periodic Pension Costs and Net Periodic Postretirement Benefit Cost
. The new guidance will improve the presentation of pension cost by providing additional guidance on the presentation of net benefit cost in the income statement and on the components eligible for capitalization in assets. The core principle of the ASU is to provide more transparency in the presentation of these costs by requiring the service cost component to be reported in the same line item as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented separately from the service cost component and outside a subtotal of income from operations. The amendments require that the Consolidated Statements of Income impacts be applied retrospectively, while Balance Sheet changes should be applied prospectively. The ASU is effective for annual reporting periods, including interim periods within those annual periods, beginning after December 15, 2017. The Company adopted the newly issued ASU as of January 1, 2018. The adoption of the standard did not have a material impact, and therefore we did not retrospectively reclass prior years’ expense.
We adopted Accounting Standard Update, or ASU, 2018-02,
Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
, in the first quarter of 2018. The ASU allows for the reclassification of stranded tax effects on items resulting from the Tax Cuts and Jobs Act, or the 2017 Tax Act, from accumulated other comprehensive income, or AOCI, to retained earnings. Tax effects unrelated to the 2017 Tax Act are released from AOCI using either the specific identification approach or the portfolio approach based on the nature of the underlying item. We elected not to reclassify the income tax effects of the 2017 Tax Act.
In March 2018, the FASB issued ASU 2018-05, In
come Taxes (Topic 740), Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118
. The ASU adds various Securities and Exchange Commission (“SEC”) paragraphs pursuant to the issuance of the December 2017 SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) (“Tax Cuts and Jobs Act”), which was effective immediately. The SEC issued SAB 118 to address concerns about reporting entities’ ability to timely comply with the accounting requirements to recognize all of the effects of the Tax Cuts and Jobs Act in the period of enactment. SAB 118 allowed disclosure that timely determination of some or all of the income tax effects from the Tax Cuts and Jobs Act was incomplete by the due date of the 2017 financial statements and if possible to provide a reasonable estimate. We accounted for the tax effects of the Tax Cuts and Jobs Act under the guidance of SAB 118 on a provisional basis at December 31, 2017. As of December 31 , 2018, our accounting for the Tax Cuts and Jobs Act is complete.
In June 2018, the FASB issued ASU 2018-07,
Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee share-based payment accounting
, which is intended to reduce the cost and complexity of accounting for, and improve financial reporting for share-based payments to nonemployees for goods and services. The ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2018. The guidance should be applied prospectively and early adoption is permitted. We are currently evaluating the effect, if any, that the ASU will have on our consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU No. 2018-13,
Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”)
which amends ASC 820, Fair Value Measurement. ASU 2018-13 modifies the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2019, with early adoption permitted for removed or modified disclosures, and delayed adoption of the additional disclosures until their effective date. We are currently evaluating the effect that the ASU will have on our consolidated financial statements and related disclosures.
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ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
In August 2018, the FASB issued ASU 2018-14,
Compensation—Retirement Benefits—Defined Benefit Plans—General (Topic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans (ASU 2018-14)
, which modifies the disclosure requirements for defined benefit pension plans and other postretirement plans. ASU 2018-14 is effective for fiscal years ending after December 15, 2020, and earlier adoption is permitted. We are currently evaluating the effect that the ASU will have on our consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU 2018-15,
Customer's Accounting for Fees Paid in a Cloud Computing Arrangement
, which helps entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (CCA) by providing guidance for determining when an arrangement includes a software license and when an arrangement is solely a hosted CCA service. Under ASU 2018-15, customers will apply the same criteria for capitalizing implementation costs as they would for an arrangement that has a software license. The new guidance also prescribes the balance sheet, income statement, and cash flow classification of the capitalized implementation costs and related amortization expense, and requires additional quantitative and qualitative disclosures. The new standard is effective for us on January 1, 2020. Early adoption is permitted, including adoption in any interim period for which financial statements have not been issued. Entities can choose to adopt the new guidance prospectively to eligible costs incurred on or after the date this guidance is first applied or retrospectively . We are currently evaluating the effect that the ASU will have on our consolidated financial statements and related disclosures.
Note 2 – Inventories, net
Inventories, net, consisting principally of hardware and component parts, are stated at the lower of cost or net realizable value. Cost is determined using the FIFO method.
Inventories, net are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
|
|
(in thousands)
|
|
Component parts
|
|
$
|
5,445
|
|
$
|
4,691
|
|
Work-in-process and finished goods
|
|
|
8,983
|
|
|
7,349
|
|
Total
|
|
$
|
14,428
|
|
$
|
12,040
|
Note 3 – Business Acquisitions
On May 30, 2018, OneSpan acquired the remaining interest in Dealflo Limited and its subsidiaries (“Dealflo”), increasing our ownership percentage to 100% from 1%. Dealflo, formerly a privately-held company based in the United Kingdom, provides identity verification and end-to-end financial agreement solutions. Upon acquisition, Dealflo became a wholly-owned subsidiary of OneSpan.
Dealflo’s total purchase price consideration was $53.9 million, net of $5.7 million of cash acquired. The total purchase price consideration includes $53.1 million of cash paid to acquire the remaining 99% interest in Dealflo, as well as $0.8 million of fair value of our previous 1% ownership interest. At December 31, 2017, the book value of this ownership interest was $0.3 million. As described in Note 1 – Summary of Significant Accounting Policies, upon the adoption of ASU 2016-01 on January 1, 2018, the book value of this ownership interest was increased by $0.5 million to record the equity investment at $0.8 million within our consolidated financial statements.
This acquisition is accounted for as a business combination using the acquisition method of accounting, which requires the net assets acquired and liabilities assumed to be recognized at their fair values on the acquisition date. The values assigned to the assets acquired and liabilities assumed are based on preliminary estimates of fair value available as of the date of this Annual Report on Form 10-K, and may be adjusted during the measurement period of up to twelve months from the date of acquisition. Any changes in the estimated fair values of the assets acquired and liabilities assumed during the measurement period may result in adjustments to goodwill.
Table of Contents
ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
During the three months ended December 31, 2018, we recorded certain measurement period adjustments to amounts previously reported, primarily related to an increase of $1.8 million in the estimated fair value of acquired customer relationship intangible assets, an adjustment related to the deferred tax liability and other various working capital adjustments.. The effect of the measurement period adjustments recorded in the fourth quarter have been determined as if such adjustments had been accounted for at the acquisition date. The net effect of the measurement period adjustments reduced goodwill by $1.7 million. The measurement period adjustments did not result in material income statement effects in the three months ended December 31, 2018.
As of December 31, 2018, the primary areas that are not yet finalized are the estimations of deferred tax assets and liabilities and income taxes payable as of the acquisition date. We are still in the process of seeking and evaluating information used in the estimation of these fair value estimates as of the acquisition date.
The following table summarizes our preliminary allocation of the purchase price consideration based on the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition (net of cash acquired):
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
(in thousands)
|
|
|
Acquired tangible assets
|
|
$
|
2,037
|
|
|
Acquired intangible assets
|
|
|
17,900
|
|
|
Liabilities assumed
|
|
|
(4,250)
|
|
|
Goodwill
|
|
|
38,167
|
|
|
Total purchase price consideration
|
|
$
|
53,854
|
The excess of purchase consideration over net assets assumed was recorded as goodwill, which represents the strategic value assigned to Dealflo, including expected benefits from synergies resulting from the acquisition, as well as the knowledge and experience of the workforce in place. In accordance with applicable accounting standards, goodwill is not amortized and will be tested for impairment at least annually, or more frequently, if certain indicators are present. Goodwill and intangible assets related to this acquisition are not deductible for foreign tax purposes.
Based on the final results of the acquisition valuation, $17.9 million of the purchase price consideration has been allocated to identifiable intangible assets. The following table summarizes the major classes of intangible assets, as well as the estimated weighted-average amortization periods:
|
|
|
|
|
|
|
|
|
Estimated Fair Value
|
|
Weighted Average Amortization Period
|
|
Identifiable Intangible Assets
|
|
(in thousands)
|
|
(Years)
|
|
Customer relationships
|
$
|
11,800
|
|
7
|
|
Technology
|
|
5,900
|
|
4
|
|
Trademarks
|
|
200
|
|
3
|
|
|
$
|
17,900
|
|
|
The results of operations of Dealflo subsequent to the acquisition date have been included in the consolidated statement of operations of the year ended December 31, 2018. Revenue generated by Dealflo for the year ended December 31, 2018 was $4.0 million. The Dealflo net loss included in the results of operations for the year ended December 31, 2018 was $4.1 million.
The acquisition related costs directly attributable to the business combination of $1.1 million, including professional fees, and other direct expenses, were expensed as incurred and included in general and administrative expense in the consolidated statement of operations for the year ended December 31, 2018.
Table of Contents
ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
Unaudited Pro Forma Financial Information
The following presents the unaudited pro forma combined results of operations of the Company with Dealflo for the year ended December 31, 2018 and 2017, assuming Dealflo was acquired at the beginning of 2017, and after giving effect to certain pro forma adjustments. Pro forma adjustments for the year ended December 31, 2018 reflect estimated amortization expense for intangible assets purchased of $1.3 million, the elimination of $0.2 million of revenue related to intercompany transactions, and the elimination of $1.1 million of non-recurring acquisition-related costs. Pro forma adjustments for the year ended December 31, 2017 reflect estimated amortization expense for intangible assets purchased of $3.2 million, the addition of $1.1 million of non-recurring acquisition-related costs, the elimination of $0.5 million of revenue related to intercompany transactions, and a $0.6 million reduction of revenue to reflect the estimated fair value adjustment of acquired deferred revenue.
These unaudited pro forma results are not necessarily indicative of the actual consolidated results of operations had the acquisition actually occurred on January 1, 2017 or of future results of operations of the consolidated entities (in thousands except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
|
|
(in thousands)
|
|
Revenue
|
|
$
|
219,847
|
|
$
|
198,717
|
|
Net loss
|
|
|
(6,164)
|
|
|
(32,990)
|
|
Basic net loss per share
|
|
|
(0.15)
|
|
|
(0.83)
|
|
Diluted net loss per share
|
|
|
(0.15)
|
|
|
(0.83)
|
|
Shares used in computing basic and diluted net loss per share
|
|
|
39,932
|
|
|
39,802
|
Note 4 – Revenue
As described in Note 1, the Company adopted Topic 606 on January 1, 2018. As a result, the Company has changed its accounting policy for revenue recognition as detailed below.
The Company adopted Topic 606 using the modified retrospective method under which the cumulative effect of initially applying Topic 606 was an adjustment to the opening balance of Accumulated Income of $11.9 million, net of tax, as of January 1, 2018. The comparative information has not been adjusted and continues to be reported under Topic 605. The details of the significant changes and quantitative impact of the changes are set out below.
Term Licenses
For revenues generated from arrangements that included term licenses to our software, the Company previously recognized revenue ratably over the term of the contract when
vendor-specific objective evidence (“
VSOE”) did not exist for all undelivered elements. Under Topic 606, these licenses are considered licenses of functional intellectual property, which requires recognition at the point in time all of the revenue recognition criteria per Topic 606 are met, which for the Company is generally when the customer is provided access to the software and the license term has commenced. Revenue from the license of software is recorded upon shipment or, if an acceptance period is allowed, at the latter of shipment or customer acceptance. No significant obligations or contingencies exist with regard to delivery, customer acceptance or rights of returns at the time revenue is recognized. We have established a stand-alone selling price (SSP) for all other performance obligations in the contract. Accordingly, the Company now recognizes revenue from these licenses, based on the residual approach due to highly variable pricing, at the beginning of the license period and recognizes the transaction price allocated to the other performance obligations in the contract (typically maintenance and support) over the period in which those performance obligations are satisfied. This is consistent with the method of recognizing revenue for perpetual licenses of intellectual property. Fees paid to third party software providers in term license arrangements are recognized when the term license revenues are recognized.
Table of Contents
ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
For large-volume transactions, we may negotiate a specific price that is based on the number of users of the software license or quantities of hardware supplied. The per unit prices for large-volume transactions are generally lower than transactions for smaller quantities and the price differences are commonly referred to as volume-purchase discounts.
Sales Commissions
The Company incurs incremental costs related to commissions, which can be directly tied to obtaining a contract. For commissions earned by sales personnel, the Company previously expensed these amounts when they were earned by the employees. As a result of adopting Topic 606, the Company now capitalizes commissions associated with new customers and amortizes the costs over a period in which the Company is expected to benefit, which can be up to seven years. The amortization is reflected in Sales and Marketing in the statement of operations. For certain contracts, any commission that is subject to a service period, such as continued employment, is expensed as incurred within Sales and Marketing in the statement of operations.
Disaggregation of Revenues
The following tables present our revenues disaggregated by major products and services, geographical region and timing of revenue recognition.
Revenue by major products and services (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2018
|
|
2017*
|
|
|
2016*
|
|
Hardware products
|
|
$
|
105,560
|
|
$
|
105,867
|
|
$
|
126,198
|
|
Software licenses
|
|
|
47,417
|
|
|
41,390
|
|
|
29,859
|
|
Subscription
|
|
|
15,426
|
|
|
10,296
|
|
|
7,301
|
|
Professional services
|
|
|
5,743
|
|
|
4,891
|
|
|
4,681
|
|
Maintenance, support and other
|
|
|
38,134
|
|
|
30,847
|
|
|
24,265
|
|
Total Revenue
|
|
$
|
212,280
|
|
$
|
193,291
|
|
$
|
192,304
|
Revenue by location of customer for the years ended December 31, 2018, 2017, and 2016 (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMEA
|
|
Americas
|
|
APAC
|
|
Total
|
|
|
Total Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
$
|
103,293
|
|
$
|
54,979
|
|
$
|
54,008
|
|
$
|
212,280
|
|
|
2017*
|
|
$
|
92,859
|
|
$
|
52,981
|
|
$
|
47,451
|
|
$
|
193,291
|
|
|
2016*
|
|
$
|
95,897
|
|
$
|
33,204
|
|
$
|
63,203
|
|
$
|
192,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
49
|
%
|
|
26
|
%
|
|
25
|
%
|
|
100
|
%
|
|
2017*
|
|
|
48
|
%
|
|
27
|
%
|
|
25
|
%
|
|
100
|
%
|
|
2016*
|
|
|
50
|
%
|
|
17
|
%
|
|
33
|
%
|
|
100
|
%
|
Table of Contents
ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
*Prior period amounts are presented under ASC 605 and ASC 985-605.
Timing of revenue recognition (in thousands)
|
|
|
|
|
|
|
|
Year ended
|
|
|
|
December 31, 2018
|
|
Products and Licenses transferred at a point in time
|
|
$
|
152,977
|
|
Services transferred over time
|
|
|
59,303
|
|
Total Revenue
|
|
$
|
212,280
|
Impacts on Financial Statements
The following tables summarize the impacts of adopting Topic 606 on the Company’s consolidated financial statements as of December 31, 2018 and for the year ended December 31, 2018.
Balance Sheet (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
As Reported
|
|
Adjustments
|
|
Balances without the adoption of Topic 606
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net of allowance
|
$
|
59,631
|
|
$
|
(331)
|
|
$
|
59,300
|
|
Contract asset
|
|
7,962
|
|
|
(7,962)
|
|
|
—
|
|
Other current assets
|
|
5,705
|
|
|
(703)
|
|
|
5,002
|
|
Total current assets
|
|
191,956
|
|
|
(8,996)
|
|
|
182,960
|
|
Deferred income taxes
|
|
5,601
|
|
|
587
|
|
|
6,188
|
|
Contract asset - non-current
|
|
3,316
|
|
|
(3,316)
|
|
|
—
|
|
Other assets
|
|
8,400
|
|
|
(289)
|
|
|
8,111
|
|
Total assets
|
$
|
352,826
|
|
$
|
(12,014)
|
|
$
|
340,812
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
Deferred revenue
|
$
|
33,633
|
|
$
|
3,019
|
|
$
|
36,652
|
|
Short-term income taxes payable
|
|
6,905
|
|
|
(1,209)
|
|
|
5,696
|
|
Other accrued expenses
|
|
9,323
|
|
|
(116)
|
|
|
9,207
|
|
Total current liabilities
|
|
72,357
|
|
|
1,694
|
|
|
74,051
|
|
Deferred revenue - non-current
|
|
10,672
|
|
|
3,391
|
|
|
14,063
|
|
Deferred income taxes
|
|
2,661
|
|
|
(424)
|
|
|
2,237
|
|
Total liabilities
|
|
100,385
|
|
|
4,661
|
|
|
105,046
|
|
Stockholders' equity
|
|
|
|
|
|
|
|
|
|
Accumulated income
|
|
172,378
|
|
|
(16,675)
|
|
|
155,703
|
|
Total stockholders' equity
|
|
252,441
|
|
|
(16,675)
|
|
|
235,766
|
|
Total liabilities and stockholders' equity
|
$
|
352,826
|
|
$
|
(12,014)
|
|
$
|
340,812
|
Table of Contents
ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
Statement of Operations (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve months ended December 31, 2018
|
|
|
|
As Reported
|
|
Adjustments
|
|
Balances without the adoption of Topic 606
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
Product and license
|
|
$
|
152,977
|
|
$
|
2,365
|
|
$
|
155,342
|
|
Services and other
|
|
|
59,303
|
|
|
(5,772)
|
|
|
53,531
|
|
Total revenue
|
|
|
212,280
|
|
|
(3,407)
|
|
|
208,873
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
|
|
|
|
|
|
|
|
Product and license
|
|
|
50,706
|
|
|
605
|
|
|
51,311
|
|
Services and other
|
|
|
14,107
|
|
|
—
|
|
|
14,107
|
|
Total Cost of goods sold
|
|
|
64,813
|
|
|
605
|
|
|
65,418
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
147,467
|
|
|
(4,012)
|
|
|
143,455
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Costs
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
63,805
|
|
|
1,108
|
|
|
64,913
|
|
Total operating costs
|
|
|
147,443
|
|
|
1,108
|
|
|
148,551
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
24
|
|
|
(5,120)
|
|
|
(5,096)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes
|
|
|
3,553
|
|
|
(5,120)
|
|
|
(1,567)
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes
|
|
|
(293)
|
|
|
(365)
|
|
|
(658)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
3,846
|
|
$
|
(4,755)
|
|
$
|
(909)
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
$
|
0.10
|
|
|
|
|
$
|
(0.02)
|
|
Diluted EPS
|
|
$
|
0.10
|
|
|
|
|
$
|
(0.02)
|
The adoption of Topic 606 did not impact total operating, investing or financing cash flows in the statement of cash flows.
Contract balances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1,
|
|
December 31,
|
|
|
|
|
|
|
|
2018
|
|
2018
|
|
Receivables, inclusive of trade and unbilled
|
|
|
|
|
|
$
|
48,217
|
|
$
|
59,631
|
|
Contract Assets (current and non-current)
|
|
|
|
|
|
$
|
8,167
|
|
$
|
11,278
|
|
Contract Liabilities (Deferred Revenue current and non-current)
|
|
|
|
|
|
$
|
33,752
|
|
$
|
44,305
|
Table of Contents
ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
Contract assets relate primarily to multi-year term license arrangements and the remaining contractual billings. These contract assets are transferred to receivables when the right to billing occurs, which is normally over 3-5 years. The contract liabilities primarily relate to the advance consideration received from customers for subscription and maintenance services. Revenue is recognized for these services over time.
As a practical expedient, we do not adjust the promised amount of consideration for the effects of a significant financing component when we expect, at contract inception, that the period between our transfer of a promised product or service to a customer and when the customer pays for that product or service will be one year or less. We do not typically include extended payment terms in our contracts with customers.
From January 1, 2018 through December 31, 2018, the Company’s contract asset balances increased approximately $3.1 million, primarily due to new contracts in which revenue exceeded billings during the period, partially offset by transfers to accounts receivable. Deferred Revenue increased in the same period due to timing of annual renewals and Dealflo acquired deferred revenue of $1.4 million.
Transaction price allocated to the remaining performance obligations
The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
|
2019
|
|
2020
|
|
2021
|
|
Beyond 2021
|
|
Total
|
|
Future revenue related to current unsatisfied performance obligations
|
|
$
|
7,764
|
|
$
|
5,878
|
|
$
|
3,788
|
|
$
|
9,392
|
|
$
|
26,822
|
The Company applies practical expedients and does not disclose information about remaining performance obligations (a) that have original expected durations of one year or less, or (b) where revenue is recognized as invoiced.
Costs of obtaining a contract
The Company incurs incremental costs related to commissions, which can be directly tied to obtaining a contract. Under Topic 606, the Company capitalizes commissions associated with certain new contracts and amortizes the costs over a period of benefit based on the transfer of goods or services that we have determined to be up to seven years. The Amortization is reflected in Sales and Marketing in the Statement of Operations. We determined the period of benefit by taking into consideration our customer contracts, our technology and other factors, including customer attrition. Commissions are earned upon receipt of payment by the customer and requires the employee to be a current employee. For contracts with multiple year payment terms, as the commissions that are payable after year 1 are payable based on continued employment, they are expensed when incurred. Commissions and amortization expense are included in Sales and Marketing expenses on the consolidated statements of operations.
Applying the practical expedient, the Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period for the assets that the Company otherwise would have recognized is one year or less. These costs are included in Sales and Marketing expense in the consolidated statement of operations.
Table of Contents
ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
The following tables provide information related to the capitalized costs and amortization recognized in the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Capitalized costs to obtain contracts, current
|
|
|
|
|
|
|
|
|
$
|
413
|
|
Capitalized costs to obtain contracts, non-current
|
|
|
|
|
|
|
|
|
$
|
2,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
in thousands
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Amortization of capitalized costs to obtain contracts
|
|
|
|
|
|
|
|
|
$
|
283
|
|
Impairments of capitalized costs to obtain contracts
|
|
|
|
|
|
|
|
|
$
|
-
|
Note 5 – Goodwill
Goodwill activity for the two years ended December 31, 2018 consisted of the following:
|
|
|
|
|
|
in thousands
|
|
|
|
|
Net balance at December 31, 2016
|
|
$
|
54,409
|
|
Additions
|
|
|
—
|
|
Net foreign currency translation
|
|
|
1,923
|
|
Net balance at December 31, 2017
|
|
$
|
56,332
|
|
Additions
|
|
|
38,167
|
|
Net foreign currency translation
|
|
|
(2,658)
|
|
Net balance at December 31, 2018
|
|
$
|
91,841
|
Certain portions of goodwill are denominated in local currencies and are subject to currency fluctuations. No impairment of goodwill was recorded during the years ended December 31, 2018, 2017, or 2016.
Table of Contents
ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
Note 6 – Intangible Assets
Intangible asset activity for the two years ended December 31, 2018 is detailed in the following table;
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in thousands
|
|
Acquired Technology
|
|
Customer Relationships
|
|
Other
|
|
Total Intangible Assets
|
|
Net balance at December 31, 2016
|
|
$
|
11,392
|
|
$
|
24,774
|
|
$
|
10,383
|
|
$
|
46,549
|
|
Additions-Other
|
|
|
—
|
|
|
—
|
|
|
151
|
|
|
151
|
|
Disposals-Other
|
|
|
—
|
|
|
—
|
|
|
(32)
|
|
|
(32)
|
|
Net foreign currency translation
|
|
|
16
|
|
|
13
|
|
|
—
|
|
|
29
|
|
Amortization expense
|
|
|
(4,462)
|
|
|
(2,243)
|
|
|
(2,104)
|
|
|
(8,809)
|
|
Net balance at December 31, 2017
|
|
|
6,946
|
|
|
22,544
|
|
|
8,398
|
|
|
37,888
|
|
Additions-Acquisition
|
|
|
5,900
|
|
|
11,800
|
|
|
200
|
|
|
17,900
|
|
Additions-Other
|
|
|
109
|
|
|
—
|
|
|
150
|
|
|
259
|
|
Impairment
|
|
|
—
|
|
|
—
|
|
|
(478)
|
|
|
(478)
|
|
Net foreign currency translation
|
|
|
(239)
|
|
|
(486)
|
|
|
(8)
|
|
|
(733)
|
|
Amortization expense
|
|
|
(3,921)
|
|
|
(3,450)
|
|
|
(2,003)
|
|
|
(9,374)
|
|
Net balance at December 31, 2018
|
|
$
|
8,795
|
|
$
|
30,408
|
|
$
|
6,259
|
|
$
|
45,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018 balance at cost
|
|
$
|
42,511
|
|
$
|
39,078
|
|
$
|
13,712
|
|
$
|
95,301
|
|
Accumulated amortization
|
|
|
(33,716)
|
|
|
(8,670)
|
|
|
(7,453)
|
|
|
(49,839)
|
|
Net balance at December 31, 2018
|
|
$
|
8,795
|
|
$
|
30,408
|
|
$
|
6,259
|
|
$
|
45,462
|
Certain intangible assets are denominated in local currencies and are subject to currency fluctuations. Additions - Acquisitions refers to intangible assets acquired in the acquisition of Dealflo described in Note 3 – Business Acquisitions and include capitalized technology, trademarks, and customer relationships.
As a result of the Company rebranding, the value of certain intangible assets were written down during the second quarter of 2018, and impairment charges of $0.5 million were recorded for the twelve months ended December 31, 2018.
Expected amortization of the intangible assets for the years ended:
|
|
|
|
|
|
December 31, 2019
|
|
$
|
9,694
|
|
December 31, 2020
|
|
|
9,365
|
|
December 31, 2021
|
|
|
5,677
|
|
December 31, 2022
|
|
|
4,577
|
|
December 31, 2023
|
|
|
3,989
|
|
Thereafter
|
|
|
11,537
|
|
Subject to amortization
|
|
|
44,839
|
|
Trademarks
|
|
|
623
|
|
Total intangible assets
|
|
$
|
45,462
|
Note 7 – Income Taxes
Tax Reform enacted on December 22, 2017 introduced significant changes to U.S. income tax law. Effective in 2018, Tax Reform reduces the U.S. statutory tax rate from 35% to 21% and creates new taxes on certain foreign-sourced earnings which are referred to as the global intangible low-taxed income tax (“GILTI”). In addition, in 2017 we were subject to a one-time transition tax on accumulated foreign subsidiary earnings not previously subject to U.S. income tax.
Table of Contents
ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
Due to the timing of the enactment and the complexity involved in applying the provisions of Tax Reform, we made reasonable estimates of the effects and recorded provisional amounts in our financial statements as of December 31, 2017. As we collected and prepared necessary data, and interpreted the additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, we made adjustments, over the course of the year, to the provisional amounts, including refinements to deferred taxes. The accounting for the tax effects of Tax Reform has been completed as of December 31, 2018.
Tax reform required us to pay U.S. income taxes on accumulated foreign subsidiary earnings not previously subject to U.S. income tax at a rate of 15.5% to the extent of foreign cash and certain other net current assets and 8% on the remaining earnings. We recorded a provisional amount for our one-time transitional tax liability and income tax expense of $18.2 million as of December 31, 2017. During 2018 we recorded a measurement period adjustment of $2.5 million as a reduction to the provisional estimates recorded at the end of 2017 due to the release of regulations on the one-time transition tax which reduced long term taxes payable. After the utilization of existing tax credits, we expect to pay U.S. federal taxes of approximately $10.6 million over eight years related to the repatriation tax.
Due to the change in the statutory tax rate from Tax Reform, we remeasured our deferred taxes as of December 31, 2017 to reflect the reduced rate that will apply in future periods when these deferred taxes are settled or realized. We recognized a deferred tax expense of $2.3 million to reflect the reduced U.S. tax rate and other effects of Tax Reform as of December 31, 2017. During 2018, we recorded an adjustment of $0.5 million as a reduction of the provisional estimate which reduced current taxes payable.
As a result of Tax Reform, earnings of all foreign subsidiaries have been designated as available for distribution. Previously, earnings of certain foreign subsidiaries were deemed permanently reinvested. During the fourth quarter of 2017, we provisionally provided deferred income tax expense of $7.3 million for foreign taxes on distributions from foreign subsidiaries previously designated as permanently reinvested. No adjustment has been made during 2018.
The GILTI provisions require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. The Company could be subjected to incremental U.S. tax on GILTI income beginning in 2018. For 2018, the amount was less than $0.1 million. FASB Topic 740 allows the company to treat GILTI as either a deferred tax asset or liability or to account for the impacts in the period in which it is incurred. The Company has decided to account for GILTI tax in the period in which it is incurred.
Income before income taxes was generated in the following jurisdictions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
(4,347)
|
|
$
|
(1,877)
|
|
$
|
(11,170)
|
|
Non-U.S.
|
|
|
7,900
|
|
|
10,258
|
|
|
22,547
|
|
Total
|
|
$
|
3,553
|
|
$
|
8,381
|
|
$
|
11,377
|
Table of Contents
ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
For the years ended December 31, 2018, 2017, and 2016, domestic income excludes taxable intercompany dividend income of $133.3 million, $0, and $8.8 million, respectively. The provision (benefit) for income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(3,792)
|
|
$
|
14,299
|
|
$
|
(90)
|
|
State
|
|
|
97
|
|
|
141
|
|
|
5
|
|
Foreign
|
|
|
10,833
|
|
|
3,287
|
|
|
5,915
|
|
Total current
|
|
|
7,138
|
|
|
17,727
|
|
|
5,830
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(333)
|
|
|
6,043
|
|
|
(2,985)
|
|
State
|
|
|
15
|
|
|
(200)
|
|
|
115
|
|
Foreign
|
|
|
(7,113)
|
|
|
7,210
|
|
|
(2,097)
|
|
Total deferred
|
|
|
(7,431)
|
|
|
13,053
|
|
|
(4,967)
|
|
Total
|
|
$
|
(293)
|
|
$
|
30,780
|
|
$
|
863
|
Our U.S. federal statutory rate for 2018 was 21%. For 2017 and 2016, our U.S. statutory rate varied with taxable income and was 35% and 34%, respectively. The differences between the income tax provisions computed using the statutory federal income tax rate and the provisions for income taxes reported in the consolidated statements of operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected tax at statutory rate
|
|
$
|
747
|
|
$
|
2,933
|
|
$
|
3,884
|
|
Foreign taxes at other rates
|
|
|
(1,308)
|
|
|
(3,139)
|
|
|
(7,512)
|
|
US tax on foreign earnings, net of foreign tax credits
|
|
|
—
|
|
|
(226)
|
|
|
(405)
|
|
Valuation allowances on NOL carryforwards
|
|
|
2,894
|
|
|
3,997
|
|
|
3,816
|
|
US tax reform - deemed repatriation
|
|
|
(2,534)
|
|
|
18,472
|
|
|
—
|
|
US tax reform - changes in indefinite reinvestment assertion
|
|
|
—
|
|
|
7,281
|
|
|
—
|
|
US tax reform - deferred tax expense from tax rate change
|
|
|
(462)
|
|
|
2,339
|
|
|
—
|
|
State income taxes, net of federal benefit
|
|
|
(79)
|
|
|
(59)
|
|
|
83
|
|
Disallowed expenses and other
|
|
|
449
|
|
|
(818)
|
|
|
997
|
|
Total
|
|
$
|
(293)
|
|
$
|
30,780
|
|
$
|
863
|
Table of Contents
ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
Significant components of our deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2018
|
|
2017
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Stock and long-term compensation plans
|
|
$
|
2,284
|
|
$
|
1,855
|
|
Foreign NOL & other carryforwards
|
|
|
23,785
|
|
|
20,864
|
|
US state NOL carryforwards
|
|
|
842
|
|
|
823
|
|
Deferred revenue
|
|
|
627
|
|
|
1,278
|
|
Pension liability, net
|
|
|
1,078
|
|
|
974
|
|
Amortization and depreciation
|
|
|
770
|
|
|
753
|
|
Accrued expenses and other
|
|
|
1,138
|
|
|
1,246
|
|
Total gross deferred tax assets
|
|
|
30,524
|
|
|
27,793
|
|
Less: Valuation allowance
|
|
|
(15,170)
|
|
|
(12,805)
|
|
Net deferred income tax assets
|
|
$
|
15,354
|
|
$
|
14,988
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
Accruals
|
|
$
|
549
|
|
$
|
506
|
|
Foreign tax on unremitted foreign earnings
|
|
|
1,650
|
|
|
7,434
|
|
Intangible assets
|
|
|
10,215
|
|
|
9,341
|
|
Deferred tax liabilities
|
|
$
|
12,414
|
|
$
|
17,281
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets (liabilities)
|
|
$
|
2,940
|
|
$
|
(2,293)
|
Deferred tax assets and liabilities are netted by tax jurisdiction.
At December 31, 2018, we had foreign and state net operating loss (NOL) carryforwards and other foreign deductible carryforwards as shown in the following table:
|
|
|
|
|
|
|
|
|
|
Carryforward
|
|
Expiration
|
|
NOL Carryforward
|
|
|
|
|
|
|
Canada
|
|
$
|
51,310
|
|
2024-2038
|
|
United Kingdom
|
|
|
12,936
|
|
None
|
|
Other foreign
|
|
|
7,370
|
|
None
|
|
Canada province
|
|
|
49,282
|
|
2024-2038
|
|
U.S. states
|
|
|
11,318
|
|
2019-2030
|
|
|
|
|
132,216
|
|
|
|
Other Carryforwards
|
|
|
|
|
|
|
Canada
|
|
|
10,829
|
|
None
|
|
Canada province
|
|
|
24,960
|
|
None
|
|
Canada (credit)
|
|
|
1,206
|
|
|
|
|
|
|
36,995
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
169,211
|
|
|
The net change in the valuation allowance for the years ended December 31, 2018 and December 31, 2017 were increases of $
2.4
million
and $6.5, respectively, and a decrease for the year ended December 31, 2016 of $7.4 million. Valuation allowances are reviewed on a regular basis and adjustments made as appropriate. The increase in the valuation allowance in 2018 reflects NOLs and credits for which the realization is not more likely than not. The change in the valuation allowance also reflects other factors including, but not limited to, changes in our assessment of our ability to use existing NOLs and other deduction carryforwards, changes in currency rates, and adjustments to reflect differences
Table of Contents
ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
between the actual returns filed and the estimates we made at financial reporting dates. The company expects to generate taxable income to realize deferred tax assets net of valuation allowance in each jurisdiction.
Our policy is to record interest and penalties on income taxes as income tax expense. We provided less than $0.1 million during each of the years ended December 31, 2018, 2017, and 2016.
ASC 740, Income Taxes sets a “more likely than not” criterion for recognizing the tax benefit of uncertain tax positions. As of December 31, 2018, 2017, and 2016, we had reserves of $0.4
million
, $0.1 million, and $
0.6 million
, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of year ended December 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Reserve at beginning of year
|
|
$
|
107
|
|
$
|
662
|
|
$
|
560
|
|
Increases related to prior year tax positions
|
|
|
427
|
|
|
7
|
|
|
217
|
|
Lapse of statute of limitations
|
|
|
(107)
|
|
|
(562)
|
|
|
(115)
|
|
Total
|
|
$
|
427
|
|
$
|
107
|
|
$
|
662
|
We file income tax returns in the U.S. federal jurisdiction and in many state and foreign jurisdictions. We are subject to examination of our income tax returns by the IRS and other tax authorities. Our 2016 through 2018 tax years are currently being examined in Belgium.
We believe that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in our tax audits are resolved in a manner not consistent with management's expectations, we could be required to adjust our provision for income taxes in the period such resolution occurs. Included in the balance of unrecognized tax benefits as of December 31, 2018 is $0.3 million, of tax benefits that, if recognized, would affect the effective tax rate. Although the timing of resolution, settlement, and closure of audits is not certain, it is reasonably possible that certain non-U.S. tax audits may be concluded within the next 12 months, which could significantly increase or decrease the balance of our gross unrecognized tax benefits.
We estimate that our unrecognized tax benefits as of December 31, 2018 could possibly decrease by approximately $0.4 million in the next 12 months.
Our primary tax jurisdictions and the earliest tax year subject to audit are presented in the following table.
|
|
|
|
|
Australia
|
|
2010
|
|
Austria
|
|
2012
|
|
Belgium
|
|
2016
|
|
Canada
|
|
2014
|
|
Netherlands
|
|
2013
|
|
Singapore
|
|
2013
|
|
Switzerland
|
|
2017
|
|
United Kingdom
|
|
2017
|
|
United States
|
|
2015
|
Note 8 – Stock Compensation Plans (sharecounts in thousands)
In June 2009, our stockholders approved and in June 2014 our stockholders reapproved the OneSpan Inc. 2009 Equity Incentive Plan, formerly known as the “VASCO Data Security International Inc. 2009 Incentive Plan” (the “2009 Equity Plan”). The 2009 Equity Plan permits the issuance of awards in a variety of forms, including (1) shares of our common stock, (2) nonqualified and incentive stock options for the purchase of our common stock, (3) stock
Table of Contents
ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
appreciation rights, (4) deferred stock, (5) other stock-based awards (including restricted shares, performance shares, performance units and other stock unit awards), and (6) cash incentive awards.
The 2009 Equity Plan may provide performance incentives to employees and non-employee directors, consultants and other key persons of the Company. The plan is administered by the Compensation Committee as appointed by the Board of Directors and is intended to be a non-qualified plan.
As of December 31, 2018, the remaining number of shares allowed to be issued under the 2009 Equity Plan was 6,
032
shares of the company’s common stock, representing 15% of the issued and outstanding shares of the company as of such date.
The following table summarizes compensation expense recorded under the two plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
in thousands
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock
|
|
|
$
|
3,973
|
|
$
|
3,466
|
|
$
|
2,766
|
|
Long-term compensation plan
|
|
|
|
2,118
|
|
|
1,906
|
|
|
2,105
|
|
Total compensation
|
|
|
$
|
6,091
|
|
$
|
5,372
|
|
$
|
4,871
|
Time-Based Restricted Stock
Time-based restricted stock awards granted to non-employee directors vest on the first anniversary date of the grant. Awards granted to certain executive officers in 2018 vest in equal semi-annual installments over four years. Shares are subject to forfeiture if the service period requirement is not met. Compensation expense equal to the market value of the stock on the grant date is recorded on a straight-line basis over the vesting period. Compensation expense was $
2.0 million
, $
2.1 million
, and $
2.2 million
for 2018, 2017, and 2016, respectively. Tax benefit related to the compensation expense was $0.5 million, $0.6 million, and $0.7 million for 2018, 2017, and 2016, respectively. The following table summarizes the time-based restricted stock activity for the year ended December 31, 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
|
|
|
average
|
|
|
average
|
|
|
|
|
|
remaining
|
|
|
grant date
|
|
(in thousands)
|
|
Shares
|
|
term (years)
|
|
|
fair value
|
|
Outstanding at January 1, 2018
|
|
269
|
|
1.58
|
|
$
|
16.99
|
|
Shares vested
|
|
(162)
|
|
|
|
|
16.82
|
|
Shares awarded
|
|
183
|
|
|
|
|
14.79
|
|
Shares forfeited
|
|
(49)
|
|
|
|
|
18.72
|
|
Outstanding at December 31, 2018
|
|
241
|
|
2.17
|
|
$
|
15.08
|
The unamortized future compensation expense for time-based restricted stock awards was $2.6 million at December 31, 2018.
Performance-Based Restricted Stock
Performance-based restricted stock awards granted to executive officers in 2018 were subject to achievement of three year performance targets established by the Board of Directors. Earned shares related to three-year targets vest upon completion of the three-year period. Shares are subject to forfeiture if the service period requirement is not met.
Compensation expense, equal to the market value of the stock on the grant date, is recorded on a graded basis over the vesting period at the performance level deemed probable, as required by ASC 718. Compensation expense in 2018, 2017, and 2016 was $2.0
million
, $
1.3 million
, and $
0.6 million
. Tax benefit related to the compensation expense
Table of Contents
ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
was $0.5 million, $0.5 million, and $0.1 million for 2018, 2017, and 2016, respectively. Unamortized future compensation expense for performance-based restricted stock was $1.
6
million at December 31, 2018.
The following table summarizes activity related to unvested performance restricted stock shares during 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
|
Total
|
|
average
|
|
|
average
|
|
|
|
Unvested
|
|
remaining
|
|
|
grant date
|
|
(in thousands)
|
|
Shares
|
|
term (years)
|
|
|
fair value
|
|
Outstanding at January 1, 2018
|
|
236
|
|
1.85
|
|
$
|
15.69
|
|
Shares vested
|
|
(25)
|
|
|
|
|
14.79
|
|
Shares awarded
|
|
187
|
|
|
|
|
14.89
|
|
Shares forfeited
|
|
(68)
|
|
|
|
|
16.79
|
|
Outstanding at December 31, 2018
|
|
330
|
|
1.45
|
|
$
|
15.07
|
At December 31, 2018, total unvested shares consists of 9 earned shares and 321 unearned shares.
Note 9 – Earnings per Common Share (sharecounts in thousands)
Basic earnings per share is based on the weighted average number of shares outstanding and excludes the dilutive effect of unvested common stock equivalents. Diluted earnings per share is based on the weighted average number of shares outstanding and includes the dilutive effect of unvested common stock equivalents to the extent they are not anti-dilutive. Because the Company was in a net loss position for the year ended December 31, 2017, diluted net loss per share for this period excludes the effects of common stock equivalents, which are anti-dilutive.
A reconciliation of the shares included in the basic and fully diluted earnings per share calculations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
in thousands, except per share data
|
|
2018
|
|
2017
|
|
2016
|
|
Net income (loss)
|
|
$
|
3,846
|
|
$
|
(22,399)
|
|
$
|
10,514
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
39,932
|
|
|
39,802
|
|
|
39,719
|
|
Incremental shares with dilutive effect:
|
|
|
|
|
|
|
|
|
|
|
Restricted stock awards
|
|
|
114
|
|
|
—
|
|
|
63
|
|
Diluted
|
|
|
40,046
|
|
|
39,802
|
|
|
39,782
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.10
|
|
$
|
(0.56)
|
|
$
|
0.27
|
|
Diluted
|
|
$
|
0.10
|
|
$
|
(0.56)
|
|
$
|
0.27
|
Note 10 – Employee Benefit Plans
U.S. Plan
We maintain a defined contribution pension plan for U.S. employees established pursuant to Section 401(k) of the Internal Revenue Code. The plan allows voluntary employee contributions and discretionary employer contributions. For the years ended December 31, 2018, 2017, and 2016, we expensed contributions of $0.3 million, $
0.2 million
, and $0.
2 million
, respectively.
Table of Contents
ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
Non-U.S. Plan
We are subject to national mandatory pension systems and other compulsory plans, or make contributions to social pension funds based on local regulations. When our obligation is limited to the payment of the contribution into these plans or funds, the recognition of such liabilities is not required.
In addition, we have, in some countries, defined benefit plans consisting of final retirement salary and committed pension payments.
In Switzerland, the pension plan is a cash balance plan where contributions are expressed as a percentage of the pensionable salary. Contributions to Swiss plans are paid by the employees and the employer. The pension plan guarantees the amount accrued on the members’ savings accounts, as well as a minimum interest on those savings accounts. The plan assets are held in guaranteed investment contracts.
We also maintain a pension plan for our Belgian employees, in compliance with Belgian law. Contributions to Belgium plans are paid by the employees and the employer. Certain features of the plans require them to be categorized as defined benefit plans under ASC 715 due to Belgian social legislation, which prescribed a minimum annual return of 1.6% on employer contributions and 1.6% for employee contributions. The plan assets are held in guaranteed investment contracts.
The Company also includes a liability related to obligations to provide retirement benefits to employees who retire from the Company’s French subsidiary, as required by law. Per French regulations, each employee is entitled to a lump sum payment upon retirement based on years of service and salary at retirement. Benefit rights vest upon the statutory retirement age of 62. The obligation recorded represents the present value of amounts the Company expects to pay.
Components of net periodic pension cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
in thousands
|
|
|
|
|
|
|
|
|
|
|
Service cost (gross)
|
|
$
|
1,281
|
|
$
|
1,397
|
|
$
|
783
|
|
Interest cost
|
|
|
199
|
|
|
188
|
|
|
243
|
|
Expected return on plan assets
|
|
|
(327)
|
|
|
(199)
|
|
|
(157)
|
|
Amortization of unrecognized actuarial gain
|
|
|
18
|
|
|
45
|
|
|
—
|
|
Net periodic pension cost
|
|
$
|
1,171
|
|
$
|
1,431
|
|
$
|
869
|
The net unfunded status of the Non-U.S. pension plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2018
|
|
2017
|
|
Fair value of plan assets
|
|
$
|
12,823
|
|
$
|
12,390
|
|
Projected benefit obligation
|
|
|
(18,173)
|
|
|
(18,308)
|
|
Net unfunded benefit obligation
|
|
$
|
(5,350)
|
|
$
|
(5,918)
|
Net unfunded benefit obligation is recorded as other long-term liabilities in our consolidated Balance Sheets.
Table of Contents
ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
The change in the fair value of plan assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at January 1
|
|
$
|
12,390
|
|
$
|
11,024
|
|
Employee contributions
|
|
|
506
|
|
|
530
|
|
Actual return on plan assets
|
|
|
904
|
|
|
91
|
|
Benefits (paid), net of transfers
|
|
|
(1,601)
|
|
|
(1,277)
|
|
Employer contributions
|
|
|
971
|
|
|
992
|
|
Foreign exchange adjustment
|
|
|
(347)
|
|
|
1,030
|
|
Fair value of plan assets at December 31
|
|
$
|
12,823
|
|
$
|
12,390
|
The change in benefit obligations is as follows:
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
Benefit obligations at January 1
|
|
$
|
18,308
|
|
$
|
16,690
|
|
Gross service cost
|
|
|
1,281
|
|
|
1,397
|
|
Interest cost
|
|
|
199
|
|
|
188
|
|
Employee contributions
|
|
|
506
|
|
|
530
|
|
Actuarial (gains)/losses
|
|
|
(672)
|
|
|
30
|
|
Plan amendment
|
|
|
560
|
|
|
(356)
|
|
Benefits (paid), net of transfers
|
|
|
(1,601)
|
|
|
(1,277)
|
|
Foreign exchange adjustment
|
|
|
(408)
|
|
|
1,106
|
|
Benefit obligations at December 31
|
|
$
|
18,173
|
|
$
|
18,308
|
Our investment policy meets our responsibility under local social legislation and aligns plan assets with liabilities, while minimizing risk. For the years ended December 31, 2018 and 2017, plan assets are invested in guaranteed investment contracts. Fair value of guaranteed investment contracts is surrender value. Fair value is determined using Level 3 inputs as defined by ASC 820, Fair Value Measurements. Changes in our plan assets are attributable to benefit payments and contributions as we have not actively traded our asssets during the years ended December 31, 2018 and December 31, 2017.
Other
The accumulated benefit obligation for the plans were $16.5 million and $16.
7
million as of December 31, 2018 and 2017, respectively.
The Company expects to pay $1.0 million of contributions over the next twelve months.
The amounts reclassified out of other comprehensive income during the twelve months ended December 31, 2018, 2017, and 2016 were not material.
Actuarial Assumptions
Certain actuarial assumptions such as the discount rate and the long-term rate of return on plan assets have a significant effect on the amounts reported for net periodic cost and the benefit obligation. The assumed discount rates reflect the prevailing market rates of a universe of high-quality, non-callable, corporate bonds currently available that, if the obligation were settled at the measurement date, would provide the necessary future cash flows to pay the benefit obligation when due. In determining the long-term return on plan assets, the Company considers long-term rates of return of comparable low risk investments, such as Euro AA bonds.
Table of Contents
ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
The following assumptions were utilized in pension calculations:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
|
|
2018
|
|
2017
|
|
|
|
(%)
|
|
Discount rates
|
|
0.9
|
-
|
1.8
|
|
0.7
|
-
|
1.5
|
|
Inflation
|
|
1.0
|
-
|
2.0
|
|
1.0
|
-
|
1.8
|
|
Expected return on plan assets
|
|
1.3
|
-
|
2.0
|
|
1.3
|
-
|
2.0
|
|
Rate of salary increases
|
|
2.0
|
-
|
2.8
|
|
2.0
|
-
|
2.8
|
Project future pension benefits as of December 31, 2018:
|
|
|
|
|
|
2019
|
|
$
|
513
|
|
2020
|
|
|
446
|
|
2021
|
|
|
747
|
|
2022
|
|
|
785
|
|
2023
|
|
|
755
|
|
Beyond
|
|
|
3,953
|
Note 11 – Geographic, Customer and Supplier Information
In prior years, we classified our sales by our customers’ locations in four geographic regions: 1) EMEA, which included Europe, the Middle East, and Africa; 2) the United States, which includes sales in North, Central, and South America; and 3) Asia Pacific Rim; and 4) Other Countries, including Australia, Latin America and India. In 2017, we reorganized this structure into three groups by eliminating the other countries category. United States has been renamed the Americas and now includes Latin America and Canada. Australia and India are now included with Asia Pacific. Data for 2016 has been adjusted to agree to the new structure. Information regarding geographic areas for the years ended December 31, 2018, 2017, and 2016 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe,
|
|
|
|
|
|
|
|
|
|
|
|
|
Middle East,
|
|
|
|
|
|
|
|
|
|
|
|
|
Africa (EMEA)
|
|
Americas
|
|
Asia Pacific
|
|
Total
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
103,293
|
|
$
|
54,979
|
|
$
|
54,008
|
|
$
|
212,280
|
|
Gross profit
|
|
|
71,840
|
|
|
38,204
|
|
|
37,423
|
|
|
147,467
|
|
Long-lived assets
|
|
|
7,665
|
|
|
4,247
|
|
|
155
|
|
|
12,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
92,859
|
|
$
|
52,981
|
|
$
|
47,451
|
|
$
|
193,291
|
|
Gross profit
|
|
|
61,506
|
|
|
41,491
|
|
|
31,517
|
|
|
134,514
|
|
Long-lived assets
|
|
|
8,437
|
|
|
897
|
|
|
68
|
|
|
9,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
95,897
|
|
$
|
33,204
|
|
$
|
63,203
|
|
$
|
192,304
|
|
Gross profit
|
|
|
67,008
|
|
|
21,519
|
|
|
42,130
|
|
|
130,657
|
|
Long-lived assets
|
|
|
7,013
|
|
|
634
|
|
|
74
|
|
|
7,721
|
For the years 2018, 2017, and 2016, our top 10 customers contributed 24%, 27% and 36%, respectively, of total worldwide revenue. The majority of our products are manufactured by four independent vendors, headquartered in Hong Kong and Macau. Our hardware DIGIPASSES are assembled at facilities in mainland China.
Table of Contents
ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
Note 12 – Commitments and Contingencies
The company leases office space and automobiles under operating lease agreements. Future minimum rental payments required under non-cancelable leases are as follows:
|
|
|
|
|
|
Year
|
|
Amount
|
|
2019
|
|
$
|
3,817
|
|
2020
|
|
|
3,081
|
|
2021
|
|
|
2,671
|
|
2022
|
|
|
2,244
|
|
2023
|
|
|
1,941
|
|
Thereafter
|
|
|
8,870
|
|
Total
|
|
$
|
22,624
|
Rent expense under operating leases aggregated $4.9 million, $3
.8 million
and $3.4 million for the years ended December 31, 2018, 2017, and 2016, respectively. Rent expense is recorded on a straight-line basis over the life of the lease agreement. The minimum lease payments above do not include common area maintenance (“CAM”) charges or real estate taxes under our operating leases, for which the Company is also obligated. These charges are generally not fixed and can fluctuate from year to year.
At December 31, 2018, we have purchase obligations of $34.3 million, including $18.0 million of inventory purchase obligations which are expected to be consummated in the next 12 months, $14.1 million of committed hosting arrangements which will be used in the next 3 years, and $2.2 million for other software agreements related to the administration of our business which range from one to two years.
We include various types of indemnification clauses in our agreements. These indemnifications may include, but are not limited to, infringement claims related to our intellectual property, direct damages and consequential damages. The type and amount of such indemnifications vary substantially based on our assessment of risk and reward associated with each agreement. We believe the estimated fair value of these indemnification clauses is minimal, and we cannot determine the maximum amount of potential future payments, if any, related to such indemnification provisions. We have no liabilities recorded for these clauses as of December 31, 2018.
During the second quarter of 2015, our management became aware that certain of our products which were sold by our European subsidiary to a third-party distributor may have been resold by the distributor to parties in Iran, potentially including parties whose property and interests in property may be blocked pursuant to Executive Order 13224, Executive Order 13382 or that may be identified under Section 560.304 of 31 C.F.R. Part 560 as the “Government of Iran”.
We ceased shipping to such distributor. In addition, the Audit Committee of the Company’s Board of Directors initiated an internal review of this matter with the assistance of outside counsel. As a precautionary matter, concurrent initial notices of voluntary disclosure were submitted on June 25, 2015 to each of the U.S. Department of the Treasury, Office of Foreign Assets Control (“OFAC”), and the U.S. Department of Commerce, Bureau of Industry and Security (“BIS”).
The Audit Committee with the assistance of outside counsel completed their review in 2015. On December 15, 2015, we filed a letter with BIS (Office of Export Enforcement) with the conclusion that the products supplied to the distributor were not subject to United States Export Control jurisdiction. The Office of Export Enforcement issued a “no action” letter, concluding the voluntary self-disclosure process under the Export Administration Regulations.
In addition, on January 13, 2016, we filed a letter with OFAC, with the conclusions that the Company and its subsidiaries made no direct sales to Iran or any party listed by OFAC as a Specially Designated National over the five-year period under review (i.e., June 1, 2010 to June 30, 2015). The letter further noted that the investigation did not
Table of Contents
ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
identify any involvement on the part of senior management officials of the Company, and to the contrary, noted that the Company’s executive management officials had sought to implement procedures and provided notices to the Company’s sales personnel to prevent the diversion of the Company’s products to unauthorized destinations and end users.
Based upon the OFAC guidelines for monetary penalties, in the fourth quarter of 2015, we accrued $0.9 million in Other Accrued Expenses for potential penalties if they are assessed by OFAC.
During the third quarter of 2018, we received a closing letter from OFAC in which they concluded that the investigation into our voluntary filing was closed and that no penalties or other amounts would be assessed. We therefore consider the OFAC and BIS governmental aspects of this case to be concluded, and during the third quarter of 2018 reversed the $0.9 million accrual recorded in Other Accrued Expenses.
Following the June 2015 disclosure of the export controls related matter above, on July 28, 2015, a putative class action complaint was filed in the United States District Court for the Northern District of Illinois, captioned Linda J. Rossbach v. Vasco Data Security International, Inc., et al., case number 1:15‑cv‑06605, naming the Company and certain of its current and former executive officers as defendants and alleging violations under the Securities Exchange Act of 1934, as amended. The suit was purportedly filed on behalf of a putative class of investors who purchased securities of the Company between April 28, 2015 and July 28, 2015, and seeks to recover damages allegedly caused by the defendants’ alleged violations of the federal securities laws and to pursue remedies under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b‑5 promulgated thereunder. The complaint seeks certification as a class action and unspecified compensatory damages plus interest and attorneys’ fees. Pursuant to a September 1, 2015 scheduling order entered by the court, the lead plaintiff, once appointed, will have sixty days to file an amended complaint or notify the defendants that the lead plaintiff intends to rely on the current complaint. On January 30, 2017, the appointed lead plaintiff filed an amended complaint in which the allegations regarding OFAC related matters were dropped and replaced with allegations regarding public disclosures made by the defendants in April 2015 as compared to public statements made in July 2015, generally regarding the strength of the Company’s business and its future prospects. This case is now referred to by the name of the new lead plaintiff, Bunk. The defendants filed a motion to dismiss the Bunk complaint on March 31, 2017 and several other related motions and filings took place thereafter.
On September 30, 2018, the United States District Court for the Northern District of Illinois issued an opinion and order in which the court granted the Company’s motion to dismiss. Plaintiffs' amended complaint was dismissed without prejudice and the plaintiffs were granted leave by the court to file another amended complaint if they could find a way to remedy the deficiencies discussed in the Court's opinion by October 22, 2018. Plaintiffs did not file an amended complaint and have subsequently agreed to file a joint motion for dismissal of the case with prejudice. Such motion was approved by the Court on November 2, 2018, and the Company considers this case to be concluded.
On October 9, 2015, a derivative complaint was filed in the United States District Court for the Northern District of Illinois, captioned Elizabeth Herrera v. Hunt, et al., case number 1:15‑cv‑08937, naming the Company’s Board of Directors and certain of its current and former executive officers as individual defendants and the Company as a nominal defendant. Two additional complaints, captioned Beth Seltzer v. Hunt, et al., case number 2015‑ch‑15541, and William Hooper v. Hunt, et al., case number 2016‑ch‑04054, were filed on October 22, 2015 and March 22, 2016, respectively, in the Circuit Court of Cook County, Illinois naming the same defendants.
The complaints assert, among other things, that the individual defendants breached their fiduciary duties by making material misstatements in, and omitting material information from, the Company’s public disclosures and by failing to maintain adequate internal controls and properly manage the Company. Among other things, the complaints seek unspecified compensatory damages and injunctive relief.
On October 29, 2015, a defendant removed the Seltzer action to the United States District Court for the Northern District of Illinois. Thereafter, the plaintiff filed a motion to remand the action back to the Circuit Court of Cook County, Illinois, which was denied on February 3, 2016. On February 9, 2016, the court granted an agreed motion for voluntary dismissal of the Seltzer action, which dismissed the action with prejudice as to the named plaintiff’s individual claims. As for the Hooper action, the court voluntarily dismissed the case without prejudice on November 14, 2018.
Table of Contents
ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
On July 19, 2017, a derivative complaint was filed in the Circuit Court of Cook County, Illinois, captioned Fancesco D’Angelo v. Hunt, et. al., naming the Company’s Board of Directors and certain former officers as individual defendants and the Company as a nominal defendant. This complaint largely follows the allegations in the Bunk case. The D’Angelo case was consolidated with the Hooper case and dismissed at the same time. The above cases that stemmed from the 2015 OFAC matter have now been closed and the Company considers the litigation concluded.
On January 10, 2011, we purchased our wholly-owned subsidiary, DigiNotar B.V., a private company organized and existing in The Netherlands from the shareholders (“Sellers”). On September 19, 2011, DigiNotar B.V. filed a bankruptcy petition under Article 4 of the Dutch Bankruptcy Act in the Haarlem District Court, The Netherlands. The bankruptcy trustee took over management of DigiNotar B.V.’s business activities and is responsible for the administration and liquidation of DigiNotar B.V. In connection with the bankruptcy of DigiNotar B.V., in January 2015, we received a notice of potential claim by the trustee against all of the individuals who served as directors of DigiNotar, both before and after our acquisition of DigiNotar. On March 29, 2018, we entered into a settlement agreement among the bankruptcy estate, the pre-acquisition directors, the Company and its directors. After contributions from the pre-acquisition directors, and reimbursements from our insurance carrier, the amount of the settlement was not material to our financial position. We consider this case to be concluded.
In February 2017, we learned an integrated reseller and certain end customers, were named as defendants in a patent infringement lawsuit in Japan related to our CRONTO technology. We have indemnification obligations in favor of our reseller and end customers and worked with them to defend such suit. In December 2017 the Japan Patent Office ruled the plaintiff’s patent is invalid. In February 2018, a trial court decision declared the plaintiff’s patent to be invalid. Plaintiff appealed both decisions. During the three months ended December 31, 2018, the appellate court ruled against the plaintiff in both cases. No further appeals are now available and we consider this matter to be closed.
On March 14, 2017, a complaint was filed in the United States District Court for the District of Massachusetts, captioned StrikeForce Technologies, Inc. v. Vasco Data Security International, Inc., et al., claiming the Company infringed on certain patent rights of the plaintiff. On May 8, 2017, the Company answered the complaint denying the allegations of patent infringement. The parties then engaged in motion practice and discovery in the case. The plaintiff has also brought suit against various other companies in the cybersecurity industry. In one such suit in the federal district court for the Central District of California, on December 1, 2017, the court granted defendant’s motion to dismiss, finding that the StrikeForce asserted claims are invalid. StrikeForce appealed such decision. In light of such ruling, on December 20, 2017, the court in the Company’s case granted a stay of the proceedings pending the appeal in the related case. In February 2019, StrikeForce lost its appeal in the Federal Circuit and may now attempt to petition the U.S. Supreme Court. Although the ultimate outcome of litigation cannot be predicted with certainty, the Company believes that this lawsuit is without merit and intends to defend itself vigorously.
From time to time, we have been involved in the litigation incidental to the conduct of our business. Excluding matters disclosed above, we are not a party to any lawsuit or proceeding that, in management’s opinion, is likely to have a material adverse effect on its business, financial condition or results of operations.
Table of Contents
ONESPAN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(amounts in thousands, except per share data)
Note 13 – Quarterly Results of Operations (unaudited)
The quarterly results of operations are as follows:
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First
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Second
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Third
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Fourth
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|
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Quarter
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|
Quarter
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|
Quarter
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|
Quarter
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2018
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|
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|
|
|
|
|
|
|
|
Total revenues
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|
$
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45,432
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|
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49,554
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|
|
52,495
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|
|
64,799
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|
Gross profit
|
|
|
34,697
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|
|
35,981
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|
|
34,543
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|
|
42,246
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|
Operating costs
|
|
|
33,049
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|
|
38,592
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|
|
37,657
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|
|
38,145
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|
Operating income (loss)
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|
|
1,648
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|
|
(2,611)
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|
|
(3,114)
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|
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4,101
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Provision (benefit) for income taxes
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629
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(872)
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(1,702)
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|
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650
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Net income (loss)
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|
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1,792
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(1,002)
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(908)
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|
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3,964
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Net income/(loss) per share:
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Basic
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$
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0.04
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$
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(0.03)
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$
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(0.02)
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$
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0.10
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Diluted
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$
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0.04
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$
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(0.03)
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|
$
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(0.02)
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|
$
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0.10
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|
|
|
|
|
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2017
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Total revenues
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$
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41,965
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|
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45,694
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|
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51,126
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|
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54,506
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Gross profit
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|
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29,912
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|
|
32,048
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|
|
36,646
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|
|
35,908
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Operating costs
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|
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29,610
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|
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32,448
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|
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31,534
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|
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34,730
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Operating income
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|
|
302
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|
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(400)
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|
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5,112
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|
|
1,178
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Provision (benefit) for income taxes
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|
|
233
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|
|
313
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|
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2,558
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|
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27,786
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Net income (loss)
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|
|
573
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|
|
110
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|
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2,755
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(25,837)
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Net income/(loss) per share:
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|
|
|
|
|
|
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|
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Basic
|
|
$
|
0.01
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|
$
|
0.00
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|
$
|
0.07
|
|
$
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(0.65)
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Diluted
|
|
$
|
0.01
|
|
$
|
0.00
|
|
$
|
0.07
|
|
$
|
(0.65)
|
The fourth quarter of 2017 income taxes are significant due to the impact of Tax Reform, see Note 7 – Income Taxes.
Note 14
–
Related Party
In August 2017, Able N.V. (“Able”), a wholly-owned subsidiary, was sold to an employee of Able for a de minimis amount. The operating results of Able through the date of sale are included in the consolidated financial statements as of December 31, 2017, and for the years ended December 31, 2017 and 2016, and are not significant to our consolidated results. In addition, our 2017 results include a loss on sale of approximately $0.2 million, recorded in general and administrative expense.
Concurrent with the sale, we provided Able an unsecured line of credit of 1.5 million Euro ($1.8 million at an exchange rate of $1.18 dollars per Euro). Interest accrues at the rate of 2% per annum. Beginning in August 2017, Able could take advances against the line of credit for a period of eighteen months followed by twelve quarterly repayments. As of December 31, 2018, no amounts have been advanced. In addition, we entered into a transition services agreement with Able whereby we agreed to provide certain administrative services for a period of three months and Able agreed to provide office space and consulting services for an agreed upon periodic fee as long as the services are provided.
SCHEDULE II
ONESPAN INC.
VALUATION AND QUALIFYING ACCOUNTS
Allowance for doubtful accounts for trade receivables.
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Provision
|
|
|
|
Foreign
|
|
|
|
|
|
|
Beginning
|
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for Bad
|
|
|
|
Currency
|
|
Ending
|
|
For the year ended December 31,
|
|
Balance
|
|
Debts
|
|
Chargeoffs
|
|
Translation
|
|
Balance
|
|
2018
|
|
$
|
520
|
|
871
|
|
(239)
|
|
—
|
|
$
|
1,152
|
|
2017
|
|
$
|
535
|
|
120
|
|
(137)
|
|
2
|
|
$
|
520
|
|
2016
|
|
$
|
621
|
|
(85)
|
|
—
|
|
(1)
|
|
$
|
535
|
See accompanying independent auditors’ report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 15, 2019.
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OneSpan Inc.
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/s/ Scott Clements
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Scott Clements
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President and Chief Executive Officer
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Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Registrant in the capacities indicated on March 15, 2019.
POWER OF ATTORNEY
Each of the undersigned, in his capacity as an officer or director, or both, as the case may be, of OneSpan Inc. does hereby appoint Scott Clements, and each of them severally, his true and lawful attorneys or attorney to execute in his name, place and stead, in his capacity as director or officer, or both, as the case may be, this Annual Report on Form 10‑K for the fiscal year ended December 31, 2018 and any and all amendments thereto and to file the same with all exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission. Each of said attorneys shall have power to act hereunder with or without the other attorney and shall have full power and authority to do and perform in the name and on behalf of each of said directors or officers, or both, as the case may be, every act whatsoever requisite or necessary to be done in the premises, as fully and to all intents and purposes as to which each of said officers or directors, or both, as the case may be, might or could do in person, hereby ratifying and confirming all that said attorneys or attorney may lawfully do or cause to be done by virtue hereof.
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SIGNATURE
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TITLE
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/s/ Scott Clements
Scott Clements
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President, Chief Executive Officer, and Director
(Principal Executive Officer)
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/s/ Mark S. Hoyt
Mark S. Hoyt
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Chief Financial Officer
(Principal Financial and Accounting Officer)
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/s/ John N. Fox, Jr.
John N. Fox, Jr.
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Chairman
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/s/ Michael P. Cullinane
Michael P. Cullinane
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Director
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/s/ Jean K. Holley
Jean K. Holley
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Director
|
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/s/ T. Kendall Hunt
T. Kendall Hunt
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Director
|
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/s/ Matthew Moog
Matthew Moog
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Director
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